UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
{X} Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
{ } Transition Report Pursuant to 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.
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(Exact name of small business issuer in its charter)
NEVADA 43-1627555
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5285 Industrial Drive, Huntington Beach, California 92649
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(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (714) 899-4274
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
has been subject to such filing requirements for the past 90 days. Yes {X} No
{ }
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. { }
The issuer's net sales for the fiscal year ended December 31, 2002
were $1,546,234.
The aggregate market value of the issuer's common stock held by
non-affiliates of the Company as of April 11, 2003, was $2,777,380.
As of April 11, 2003, the issuer had 34,856,154 shares of Common
Stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes { } No {X}
Documents incorporated by reference: None.
Page 1 of 28
PART I
Item 1: Business
GolfGear International, Inc ("GolfGear" or the "Company") designs, develops
and markets innovative premium golf clubs intended to improve the quality and
performance of a golfer's game. Utilizing patented forged face insert
technology, the Company has created a new generation of metal woods and irons.
The Company believes that the concept of producing a golf head with a forged
face metal insert affixed to the body of an investment cast shell (head) is a
significant improvement in the approach to making a wood or iron head.
The Company believes that its forged face metal wood combines the accuracy
and forgiveness of the investment cast metal wood with the feeling, strength and
power that can only come from solid forged metal. The Company has also applied
this same technology to irons, creating a state-of-the-art forged face iron that
features the same forged face metal insert affixed to a cavity-back,
investment-cast club head. This technology produces clubs that have a solid
sweet spot, producing maximum energy transfer, which in turn provides consistent
distance and accuracy, even if miss-hit.
The Company sells a full line of patented metal woods and irons marketed
under various names, including Tsunami(R) Titanium drivers, first introduced in
1997 and updated and revised during 2002. The Company offers drivers in several
sizes ranging from 300 cc to 400 cc. All of the Company's drivers have passed
the test for spring-like effect and been approved by the USGA for play. The
Company is attempting to utilize its patented technology to position itself as a
major brand name in the golf industry.
All of the Company's products are intended to offer retailers a significant
profit margin, in contrast to many of the competitive golf products currently
offered for sale at off-course retailers and discounters. Several of the major
companies in the golf hardware industry have moved to capture market share by
selling their products through discounters and warehouse stores that, in turn,
sacrifices their retailer's margins. The Company believes that this situation
offers a substantial area of opportunity, since its proprietary products can
provide better margins to retailers.
The Company's objective is to become a leading manufacturer of drivers,
fairway woods, irons, and wedges and putters utilizing, wherever possible, its
proprietary forged face insert technology. To achieve this objective, the
Company is focusing its market strategy on enhancing the reputation of its
products, increasing market penetration of its products, continuing the
development of innovative clubs, and refining and improving existing technology.
An integral part of this strategy involves the expansion of the Company's
marketing and advertising efforts to target both domestic and international
sales. Domestically, the Company intends to create product awareness through
various channels, including direct response programs, print advertising,
television commercials and other promotional activities including on-course golf
pro shop demonstrations ("demo days"). The Company will also seek to contract
with touring professional golfers on all tours to endorse Company products. The
Company expects these professional golfers to demonstrate the effectiveness of
forged face technology and provide valuable exposure. The Company also intends
to expand its line of clubs by developing, acquiring or licensing its
technologies to other golf manufacturers. The ability of the Company to
implement its marketing strategy is subject to the Company having access to
adequate capital.
Industry Background
There are between 26 and 30 million golfers in the United States today,
with approximately 5-6 million categorized as avid golfers (defined as those
golfers playing 25 or more rounds per year). The sport is popular with both men
and women. Its popularity is gaining around the world. It is one of the few
sports in which players spend more money, as they get older. Golf equipment and
related merchandise is projected to exceed $6 billion in annual sales for 2002
according to the Golf Digest Companies.
According to Golf Digest the United States golf equipment market is
continuing to grow. Key factors fueling sales include the increasing popularity
of premium-priced oversized drivers, higher quality fairway woods, oversized
irons, new innovations in putter design and continuing interest in the sport
among new players.
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The industry comprises several types of golfers avid, medium, new and
casual. Avid golfers play frequently and spend significantly larger amounts for
brand name equipment. Medium golfers play less frequently, are less brand
conscious and play with either graphite or steel shafted clubs. Casual golfers
play several games a year and represent the largest group with the potential
upward movement from one category to another. New golfers as beginners typically
use lower cost steel shafted clubs, with a smaller number using graphite shafted
clubs.
Market leaders follow a similar pattern. Each established a market niche.
Callaway introduced the oversize metal wood to the market. Cobra followed with
oversize perimeter weighted irons. Each incorporated brand identity, product
innovation and tour validation, from the PGA Tour to the LPGA Tour to the Senior
Tour.
The Company's niche in the marketplace producing clubs using a forged face
metal titanium insert. Over the past several years, clubs have become larger,
longer and lighter. Inserts offer a more dense sweet spot, superior weight
distribution and cutting-edge technology. All titanium drivers have become
common because of the move to the larger size heads. However, there is a cost
factor involved in this transition. Fairway woods do not need to be made
completely of titanium. A stainless steel shell can be used with a forged
titanium insert, making these woods more affordable. We believe the customer
can purchase a competitively priced fairway wood from the Company at twenty-five
percent (25%) less than comparable all-titanium woods.
The Company believes that the market for golf clubs is cyclical, and that
the consumer is now ready for something new. Most of the sets sold by the major
club manufacturers in the last ten (10) years are now aging and there is a
substantial replacement market developing. Even the average golfer needs to
upgrade and replace certain clubs on a regular basis. Some competitors have
experienced tremendous growth throughout the 1990s by riding this cycle. The
Company believes that it has the opportunity to be a major candidate to fill the
product that will be sold in this next growth cycle. The Company's brand name
remains underdeveloped while other brands have begun to erode as a result of
having sold their popular models "down market". Large established brands such
as Callaway and TaylorMade will continue to do well based on their ability to
heavily promote their products on various professional tours and through major
retailers and television advertising campaigns.
Competition
Spalding, MacGregor, and Hogan are well-recognized old-line names in golf
equipment. Names currently dominating the industry's premium-brand sector are
Callaway, Titleist, Cobra, Taylor Made, Mizuno, Ping and Cleveland Golf.
Companies such as Callaway, Karsten Manufacturing (Ping) and Fortune Brands
(Titleist/Cobra) are leading a wave of golf-focused idealism among consumers.
Nike Golf represents the latest of the new breed to enter into the golf hardware
market. Nike heavily promotes forged metal woods and irons and has recently
licensed the Company's proprietary forged-face insert technology allowing it to
manufacture and sell golf clubs under the Company's patents. Nike is developing
a forged faced driver for Tour player and world's number one ranked golfer Tiger
Woods. The dominating golf companies concentrate on innovation, create new
equipment categories or rely on established market leadership position in a
particular category, such as oversized metal woods or irons.
The Company competes in the competitively priced technology based segment
of the golf club manufacturing industry that includes companies with substantial
financial resources. The Company believes that its technology, product quality
standards, and competitive pricing structure can provide a competitive edge in
the market. The Company is also selling a medium priced set of clubs for women
under the name Diva to fill what the Company perceives as a void in the industry
for medium priced women's clubs. For junior golfers, the Company offers a full
line of clubs under The Players Golf(R) trademark.
Business Strategy
The Company competes in the premium quality segment of the golf club industry, a
growing and highly competitive area. The Company introduced the new over-sized
Tsunami(R) iron and a new series of Tsunami(R) fairway woods at the PGA show in
Orlando in January of 2002. The Company introduced the Tsunami(R) 360 cc and
400 cc titanium drivers (joining its 300 cc DF and 340 cc) at the PGA Show in
Orlando in January 2003. The entire Tsunami(R) product line (woods and irons)
has been positioned at the high end of the golf market from a technology
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standpoint and are very competitively priced. The Company received notice from
the USGA that its 400 cc and 360 cc drivers have passed the test for spring-like
effect and are approved for play. The 340 cc Tsunami(R) driver outranked all of
the approximately forty (40) industry's major brand name drivers in distance
according to Rankmark.com, the Golf Industry's premier golf club testing
company. The 340 cc Tsunami(R) driver was also ranked third in accuracy and
rated second overall out of all drivers tested. Finally, the Tsunami(R) driver
was declared a co-winner with Cobra in rankmark.com's match play test.
The Company intends to increase its market visibility throughout Asia as
well as Europe and Canada. It is currently evaluating existing international
distributor relationships and considering new affiliations.
In April 2002, the Company has occupied an eleven thousand (11,000) square
foot facility located in Huntington Beach, California, which provides the
Company with sales offices, customer service operations, the capability to
conduct telemarketing operations, as well as space for assembly, finished goods
inventory, product staging and shipping. The Company continues to sub-contract
some of its assembly operations.
Overall Marketing Strategy
The Company intends to concentrate its marketing efforts in direct
marketing techniques, including direct response programs, which have evolved in
recent years as a successful medium for marketing golf products. The Company's
ability to aggressively pursue these marketing efforts is subject to the
availability of adequate operating capital. The Company has completed a
30-minute direct response program designed to promote the entire line of
Tsunami(R) drivers. It is expected that the program will be market tested in
May 2003 and, if successful, will run on The Golf Channel, ESPN, ESPN2 and Fox
Sports West throughout 2003 and 2004. The program is hosted by Rick Dees, the
nationally recognized DJ and host of the world-side syndicated "Weekly Top 40",
and features independent testing results, testimonials from professional and
amateur golfers, interviews with Company engineers and scientists and run
approximately 30 minutes. Shorter spots consisting of 30, 60 and 90 second run
times will also be aired during the same time frame and may be "tagged" along
with the Company's key retailers. The Company will also utilize current
marketing trends which allow greater access to the golf consumer including
direct advertising as well as to the on and off course shops.
The golf club industry is highly seasonal, with most companies experiencing
up to sixty percent (60%) of sales between February and June with an additional
twenty percent (20%) of sales occurring between October and December for the
Christmas buying season. The majority of the Company's products are introduced
in January at the PGA Show.
The Company attends most major industry trade shows. The Company has given
numerous trade industry press conferences around the world, maintaining a high
profile and high degree of respect in the industry press. The Company also plans
to attend more consumer-oriented shows to develop more brand awareness. These
shows have become very popular on a global basis, and can be a key element in
broadening distribution in these markets.
Most companies have used demo day programs to gain exposure at golf courses
and private country clubs. The Company has increased exposure by becoming more
active at key demo days. Technology driven, the Company is optimistic about this
marketing strategy since the consumer has shown a desire for more technical
information at recent demo events. The Company has performed extremely well when
in direct competition with the biggest competitors in the business, outselling
the competition at several events in 1999, 2000, 2001 and 2002. The demo day
programs are intended to supplement the Company's other promotional efforts.
Currently, the Company focuses on several major foreign distribution
markets, including selling clubs in South Korea and Europe, as well as other
parts of Asia. The Company expects to continue, given its product technology
and marketing approach, to attempt to increase sales in existing markets and
distribution into additional geographic regions. The Company entered into a
distribution agreement to sell its clubs in Mainland China.
Product and Name Endorsement
Page 4 of 28
The Company has periodically utilized touring professionals and former golf
professionals to represent the entire line of the Company's golf products. The
Company currently employs Gerry James, a PGA professional and one of the longest
ball hitters in the world (he currently has pending in the Guinness Book of
World Records a 473 yard drive). Mr. James appears for the Company at PGA show
events and has recently won the money title for the 2002 Pinnacle Long Drivers
Tour.
Because management has first-hand experience working with touring
professionals, the Company believes it will be able to obtain product exposure
from the various tours and anticipates some touring professional exposure,
subject to the availability of adequate operating capital. Direct Response
Programs and Other Marketing
A direct response program is typically a 30-minute program that is used to
introduce, market and sell a product at the same time. The direct response
program has been a popular way to save years of conventional marketing and
selling methods, and is a faster and more efficient way to provide the consumer
with technical information that may lead to a purchase. A direct response
program campaign is also supported by conventional selling methods.
The value of direct response programs lies in the creation of millions of
interested, informed and qualified prospects wanting to buy featured products in
stores. In addition to selling products from television, direct response
programs can be an excellent source of leads for telemarketing, for promoting a
brand image and "pushing" the retail store activity. The Company has completed
a 30-minute direct response program designed to promote the Tsunami(R) line of
drivers and has invested over $600,000 for its production. It is expected that
the program will be market tested in April 2003 and, if successful, will run on
The Golf Channel, ESPN, ESPN2 and Fox Sports West throughout 2003 and 2004. The
program is hosted by Rick Dees, the nationally recognized DJ and host of the
world-wide syndicated "Weekly Top 40", and features independent testing results,
testimonials from professional and amateur golfers, interviews with Company
engineers and scientists and run approximately 30 minutes. Shorter spots
consisting of 30, 60 and 90 second run times will also be aired during the same
time frame. The airing of this program is subject to available financing.
Along with the direct response program, the Company intends to run a print
media campaign that may include placement in publications such as the Wall
Street Journal and USA Today, and leading golfing publications such as Golf
Digest, subject to available financing.
The Company has a sales force consisting of six (6) independent sales
representatives. In some areas, the Company will have sub reps that will assist
the sales force with demo days and seminars. The Company also employs three (3)
inside sales personnel. Management participates in this field as well.
Management works weekends at demo days in order to get feedback from the
consumer. This feedback is important and provides direct input that is
incorporated at sales meetings and seminars.
Customers
The Company sells to golf pro shops ("green grass") accounts and catalog
and discount retailers ("off course") accounts. The Company has experienced
some customer concentration in the past. The collection risk is somewhat
mitigated by the fact that its 2 largest customer accounts (a 34-store discount
retailer based in southern California and a 22-store discount retailer based in
the Midwest) are multi-site retailers.
Employees
On March 21, 2003 the Company employed 14 full-time employees and no
part-time employees. None of the Company's employees are covered by a
collective bargaining agreement.
Insurance
In its opinion, the Company maintains adequate levels of business insurance
including directors and officers coverage.
Page 5 of 28
International Business
The Company distributes golf clubs worldwide. The Company intends to
generate a portion of its revenue in foreign markets. This strategy provides a
broader market opportunity and can help offset the effects of regional
recessions and market trends. The Company sells its clubs through distributors
in most countries, but in some cases the Company sells direct to retailers.
International direct selling is expected to increase somewhat in the near
future.
In December 2000, the Company entered into a three (3) year agreement with
Professional Golf Services to sell the Company's products in Europe. The
Company entered into an agreement in September 2001 with a distributor to sell
the Company's products in China. The Company is negotiating with potential
distributors in Japan, South Korea and South Africa.
Technology
Most of the Company's clubs features its multi-patented forged face insert
technology that was invented by the Company's Founder, Donald A. Anderson. The
Company currently has ten (10) patents on its forged face insert technology and
three (3) patents on its putter technology. The Company recently was awarded a
patent in Japan covering forged insert technology.
In the early 1990's, the Company, drawing on over twenty-five (25) years of
research, did what had never been done before: it installed a solid forged face
metal insert into the hitting area of an investment-cast shell. The Company's
forged face clubs combined the density, power and distance of solid forged
metals with the weight distribution, forgiveness and accuracy possible only in
investment cast woods and irons. The result is a club that gives measurably
superior performance because it has a much more solid hitting area with more
weight around the perimeter to provide an extra large sweet-spot.
The Company had the foresight to begin patenting insert technology in 1989
in the United States and in major international markets, before the January 1,
1992 rule change by the United States Golf Association (USGA) and the Royal and
Ancient (R&A) Golf Club of St. Andrews, Scotland, which legalized insert
technology in both metal woods and irons. As a result, the Company believes
that its patent portfolio with respect to insert technology is the most
comprehensive intellectual property protection package of any participant in the
golf club industry. The Company believes that no other golf manufacturing
company or individual has secured more coverage, either in the number of patents
or in the scope of claims. This patent technology forms the basis of the
Company's business plan to exploit insert technology as the next wave of golf
club design. The Company also expects that there will be an opportunity to
generate royalties by selectively licensing this technology to major golf club
manufacturers. The Company has identified and formally put on legal notice a
significant number of potential infringers of its "Forged Insert Patents".
By attaching a solid forged face metal insert into the cavity of a cast
club, the Company believes that it has created the most solid hitting surface in
golf and has put fifty percent (50%) more club head mass where it counts in the
hitting area. When more mass meets the ball at impact and the mass is forged,
not cast, maximum energy is transferred to the ball and shots travel
significantly farther. Forged metal can do this because it is denser and has a
more solid molecular structure than cast metals. Investment castings contain gas
voids and porosity that can cause hairline cracks or cave-ins and create dead
spots. Also, their porous finish and inconsistent internal structure can affect
playability.
Management believes that its patents are strong enough to eventually make
the Company a significant player in the golf industry. On January 1, 1992, the
face of golf equipment changed forever when a USGA and R&A rule was changed to
allow metal woods and irons with inserts. The Company was founded in 1989 to
prepare for the changes it anticipated in golf equipment design. In the opinion
of management, the introduction of its patented forged face woods and irons
marked one of the most significant advancements in metal innovation and
technology since the invention of the original metal wood more than twenty (20)
years earlier.
Page 6 of 28
After creating and patenting the solid steel forged face insert, the
Company has continued to stake out new ground, securing multiple domestic and
international patents for designs and inserts in several other materials such as
forged titanium, steel, aluminum, beryllium copper and related alloys. The
Company's patents also include variable face thickness technology.
Forged face insert technology offers significant performance advantages.
The Company's equipment offers levels of performance that golfers all over the
world seek in a club, including greater distance, a large sweet spot, pin-point
control, reduced vibration, increased velocity, accuracy and forgiveness, and
product identity.
Product Line
The Company's core product line is the Tsunami(R) driver, fairway woods,
irons and wedges. The woods, irons and wedges feature forged titanium inserts
that are inset into stainless steel shells, which incorporate the latest in
graphite shafts and grips. The Tsunami(R) driver, offered in 340 cc, 360 cc and
400 cc volume is the Company's entry into the super-size driver category. The
main body of the all-titanium Tsunami(R) driver is cast from aerospace-certified
6AL4V titanium and the face is fitted with a solid forged Beta 10:2:3 titanium
insert. In addition, the Company also offers a 300 cc Deep Face Tour Model. The
Company received notice in January 2003 from the USGA that its 400 cc and 360 cc
drivers have passed the test for spring-like effect and are approved for play.
All of the Company's driver products conform to USGA regulations. The 400 cc
and 360 cc incorporate a new speed slot toe and sole design with a weight port
assuring that the club's total static weight is within three (3) grams of its
target weight. These Tsunami drivers were introduced at the PGA Show in
Orlando, Florida in January 2003.
The Company's patented insert technology is unique because it can be
applied to any anticipated new trend in golf clubs, including size, shape or
material. The Company already has developed prototypes of several additional
irons using this technology. Although brand name golf equipment companies
become known by their general consumer acceptance, the Company's experience
indicates golfers today have a tendency to be attracted more by performance and
technology and less by a name brand. The Company is actively developing new
products that will be complimentary to its existing product line.
Recent Financings
The Company completed an agreement with Wyngate Limited, a Jersey Limited
Company, which included the sale of fifteen million (15,000,000) shares of
Common Stock at Seven and One-Half Cents ($0.075) per share, for an aggregate
purchase price of One Million One Hundred Twenty-Five Thousand Dollars
($1,125,000), Two Hundred Thousand Twenty-Five Dollars ($200,025) in cash and a
promissory note due and payable eighteen (18) months from the date thereof in
the principal amount of Nine Hundred Twenty-Four Thousand Nine Hundred
Seventy-Five Dollars ($924,975). The promissory note was secured pursuant to a
stock pledge agreement that pledged 12,333,000 shares of the Common Stock, which
were held by the Company as security for payment of the promissory note. See
amendment to the stock pledge agreement below. Upon the closing of this
offering, Wyngate Limited, and its President, Peter H. Pocklington, gained
control of the Company and obtained the right to appoint a majority of the board
of directors. As a requirement of the transaction Peter H. Pocklington was made
Chairman of the Board. The agreement also gives Mr. Pocklington the right to
merge the Company with his medical products company in a reverse merger at a
price of Twenty-Five Cents ($.25) per share of Common Stock. The value of the
medical products company shall be determined by obtaining a fairness opinion
from a reputable investment-banking firm.
During the fourth quarter of 2002, Mr. Pocklington loaned the Company
$200,000 in exchange for an amendment to the stock pledge agreement referred to
above to release 9,029,518 shares of Common Stock held by the Company as
security for payment of the promissory note. The promissory note remains
collateralized by 3,303,482 shares of Common Stock to secure the unpaid balance
of the promissory notes less the loan to the Company. The loan bears interest at
9 1/2% and is due on April 20, 2003. The Company's board of directors
unanimously approved the transaction by written consent on November 20, 2002.
During the year ended December 31, 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)
Page 7 of 28
months after the initial sale of the debentures. The Company's patents secure
the debentures. 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 $0.10 per share. The
deferred financing costs associated with the issuance of the debentures have
been capitalized and are being amortized over the 18 months. If the debentures
convert to equity prior to the 18-month term the unamortized portion will be
debited to additional paid in capital. The convertible debentures are due
December 6, 2003 if not converted.
The conversion price of the debentures ($.25 per share) and the exercise
price of the warrants ($.10 per share) were deemed to be less than the fair
market value of the underlying Common Stock ($.50 per share) on the transaction
date (June 6, 2002) resulting in a beneficial conversion feature as defined in
EITF 98-5. The total fair value of the warrants using the Black-Scholes
option-pricing model was $997,103. The proceeds allocated to the debentures
were $1,102,897. Because of the conversion price relative to the stock price,
and allocation of fair value to the warrants, the conversion feature of the
debenture is beneficial to the holder at the date of issuance. Since the
debenture is convertible six months from the date of issuance, EITF 98-5
requires the debenture to be recorded at a discount on the issuance date, and
then amortized to interest expense to the earliest date the debenture is
convertible using the effective interest method. The Company recorded the
discount to interest expense for the year ended December 31, 2002 using the
straight-line method, which approximates the effective interest method due to
the short maturity of the debentures.
On December 16, 2002 the Company's board of directors approved a
modification to the warrants whereby the holder, without the prior conversion of
the debenture, could exercise the warrant. As a result of the modification to
the warrants, in the first quarter of 2003 debenture holders exercised 2,800,000
warrants at $.10 per share resulting in the issuance of 2,800,000 shares of
Common Stock for $280,000 in gross proceeds.
Recent Changes in Management and the Board of Directors
On January 20, 2003 Chris Holiday was made Senior Vice-President of Sales
and Marketing for the Company. Mr. Holiday has more than 30 years of experience
in the golf industry, the last 10 years of which were spent at Callaway, where
he was credited with leading the company's sales force from No. 6 to No. 1 in
the industry, resulting in a compound annual growth rate in sales of 52 percent.
In one year at Callaway alone, he drove the golf ball sales force from No. 5 to
No. 2 with a 31 percent growth in sales. Company revenues grew from $20 million
to $850 million during his tenure. Other notable accomplishments include
establishing and building a five-store retail chain with gross sales of $6
million and No. 1 in market share. The stores were later ranked as one of the
"Top 100 Golf Shops in America" three times in Golf Shop Operations.
On October 2, 2002 Michael A. Piraino was made President, Chief Operating
Officer, Chief Financial Officer and a Director of the Company. Mr. Piraino has
over 27 years in management experience including being the President and CEO of
a public consulting and competitive strategy services company. He is a
certified public accountant. During his career, Mr. Piraino has raised more
than $350 million in equity and debt financing, and he has negotiated, closed
and integrated more than 30 acquisitions. He has taken two companies through the
IPO process.
As disclosed above Wyngate's President, Peter H. Pocklington was appointed
as Chairman of the Board of Directors. In addition to Mr. Pocklington, Wyngate
has appointed Roger Miller, Dean Reinmuth and Michael Piraino to the Company's
Board of Directors. They join Mr. Donald Anderson, the Company's Founder and
Robert Williams as directors.
Bel Air Golf Subsidiaries Acquisition
Players Golf(R) offers a full line of junior golf clubs, and Bel Air Golf
is known primarily for golf glove products that offer both value and quality.
Bel Air Golf and Players Golf(R) are collectively operated as a separate
division of the Company.
The Company issued a warrant to purchase one hundred thousand (100,000)
shares of Common Stock exercisable at $3.00 per share, vesting and exercisable
only if net revenues from Bel Air Golf and Players Golf(R) reach Two Million
Page 8 of 28
Five Hundred Thousand ($2,500,000) in 2002, a threshold that was not achieved.
This transaction closed on April 11, 2000.
Leading Edge Acquisition
On August 30, 2000, the Company entered into an agreement entitled,
"Agreement for Sale and Purchase of Assets", with Leading Edge, LLC, a
California limited liability company, for the acquisition of certain assets.
This agreement covers: (i) all rights and interests in and to the design of
Leading Edge line of putters which includes technology, including patents,
trademarks, copyrights, trade-names, including the name Leading Edge(R),
together with all related logos which are used in the sale, promotion and
licensing; (ii) all inventory, including the assembled parts, packaging and
supplies; customer and supplier list; (iii) all office furniture, equipment,
computers; all tooling, molds and dies used in the manufacture of putters; and
(iv) any pending sales orders, rights under contracts and leases in effect.
In consideration for acquiring these assets, the Company paid the
following: (i) 200,000 shares of restricted Common Stock; and (ii) a warrant to
purchase 150,000 shares of Common Stock exercisable at $1.00 per share through
August 30, 2004.
Lazereyes Golf, LLC Acquisition
On July 1, 2002, the Company entered into an agreement entitled, "Asset
Purchase Agreement", with Lazereyes Golf, LLC and Stone Pine Lazereyes, LLC,
both Colorado limited liability companies, for the acquisition of certain
assets. This agreement covers: (i) all rights and interests in and to the
design of the Lazereyes product (a training club) which includes technology,
including patents, trademarks, copyrights, trade-names, including the name
Lazereyes(R), together with all related logos which are used in the sale,
promotion and licensing; (ii) all inventory, including the assembled parts,
packaging and supplies; customer and supplier list; (iii) all office furniture,
equipment, computers; all tooling, molds and dies used in the manufacture of the
training club. No liabilities were assumed. To date there has been no income
or expense associated with Lazereyes.
In consideration for acquiring these assets, the Company paid the
following: (i) 100,000 shares of restricted Common Stock; and (ii) a royalty of
One Dollar ($1.00) for every Lazereyes Training Club sold for a period of two
(2) years commencing with August 1, 2002.
Peter Alliss Personal Service Agreement
Effective December 31, 2000, the Company entered into an agreement entitled
"Personal Services Agreement" with Peter Alliss - Golf Limited and Peter Alliss,
an individual (hereinafter collectively referred to as "Alliss"). Pursuant to
this agreement, Alliss gave the Company the right to use his name and likeness
to act as spokesperson on behalf of the Company in all advertising, marketing
and promotion efforts and in all mediums including print and television, for the
Company's golf clubs and golf related products. Pursuant to this agreement, his
likeness can be used and Alliss' services can be provided in North America,
Central America, South America, Africa (including South Africa), the Middle
East, Far East (including India) but excludes Australia, New Zealand, Malaysia,
the United Kingdom, Northern and Southern Ireland, Europe and Scandinavia. In
consideration for this agreement, the Company agreed to pay Alliss (i) 250,000
shares of the Company's restricted Common Stock; and (ii) a warrant to purchase
250,000 shares of Common Stock exercisable at $0.50 per share through December
31, 2005. The agreement also provides for certain royalties to be paid to
Alliss for the sale of golf clubs that bear his name or that are sold through
direct response programs in which Alliss appears. This agreement terminates in
December 2003.
Dean Reinmuth Services Agreement
During 2002, the Company entered into two separate agreements entitled
"Services Agreement" with Dean Reinmuth ("Reinmuth"). Pursuant to the first
Services Agreement, Reinmuth agreed to assist with arranging, developing and
Page 9 of 28
producing an instructional video on distance tips for a one-time fee of $21,000.
Pursuant to the second Services Agreement, Reinmuth agreed to assist with
arranging, developing, producing and representing the Company for the purpose of
marketing and selling golf clubs and equipment. In consideration for the
services to be rendered under this agreement, the Company agreed to pay Reinmuth
(i) a royalty of between $.25 - $1.00 per club on all Tsunami(R) clubs sold that
exceed 1,000 clubs per quarter (ii) golf equipment for Reinmuth (iii) a 4%
royalty on the sales of clubs designed by Reinmuth (iv) ten thousand dollars
($10,000) per day for appearances on behalf of the Company exceeding three (3)
per year and (v) an option to purchase one million (1,000,000) shares of the
Company's Common Stock exercisable at $.20 per share through July 29, 2009. The
second Services Agreement terminates December 31, 2005. Mr. Reinmuth is a member
of the Company's board of directors. Source of Supply
There are five (5) primary components that are necessary to produce a golf
club. The Company has access to several manufacturers that are able to produce
the same technology with the same quality standards with competitive pricing.
The Company will continue to test components produced by other vendors. The
Company is constantly working on new materials and sources of supply in the
event that additional vendors are necessary.
Patents and Know-How
The Company's ability to compete effectively with other golf companies may
be dependent, to a large degree, upon the proprietary nature of its
technologies. The Company has eight (8) United States patents and two (2)
international patents relating to the forged face technology and three (3)
patents relating to the Company's putter technology. The Company also has
several patent applications pending. The patents for insert technologies
represent an evolution that took place over a period of several years. The
first patents cover simple combinations of forged and cast elements brought
together to form a golf club head. Later filed patents have been directed
toward alternative mechanisms for holding the component parts together and
alternative versions using various combinations of metals including titanium.
Titanium is now recognized throughout the industry as a superior metal for use
in golf clubs. The patented putters include several devices that provide an
alignment mechanism. A "virtual ball" marker allows the user to visualize the
hit before the club is swung. This enables the club to be aligned to the ball,
allowing the user to hit from the sweet spot of the club. Additionally, the
putter clubs have heel and toe weighting to minimize club head rotation on
impact, ensuring a straighter shot.
The Company received its eighth (8th) domestic patent (Patent No.
5,720,673) on insert technology on February 4, 1998. The new patent further
broadens the scope of the Company's insert patent portfolio. The new patent has
a primary function of providing a means of affixing the face insert to a cast
club head. The insert is set into a recess, and locked into place by material
being pushed over the edge of the insert, thus locking it permanently into
place. The Company has also received a patent issued in Taiwan. The Company has
several other patents pending both domestically as well as internationally. The
Company will continue to focus on expanding its patent coverage on insert
technology.
The Company recently received a patent in Japan that covers "Forged Insert
Technology". The patent has several claims on forged insert technology
including a variable forged face insert thickness. The insert may be thicker in
the heel and toe areas to enhance weight distribution and density throughout the
entire hitting area.
The Company plans on filing additional patents in the future.
Licensing of Technology/Products
The Company has plans to protect its intellectual properties to the full
extent of the law. On August 21, 2002, GolfGear and Nike, Inc. jointly
announced that Nike Golf was granted 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 granted Nike
Golf the right to institute litigation against third parties for infringement of
GolfGear's patents. The Company began receiving royalty payments during the
first quarter of 2003 on products shipped by Nike.
The Company is in discussions with a number of other potential licensees
for the licensing of its patented technology.
Page 10 of 28
Cautionary Statement Pursuant to "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases,
as a well as other public documents and statements, contain "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by the statements.
Among other the risks and uncertainties include:
History of Losses; Accumulated Deficit; Working Capital Deficiency. The
Company has incurred losses of $2,730,170, $1,360,999, $912,256, $1,016,981 and
$4,272,673 for the years ended December 31, 1998, 1999, 2000, 2001 and 2002,
respectively. 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.
Going Concern. The consolidated financial statements as of and for the
year ended December 31, 2002 have been prepared assuming that the Company will
continue as a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the consolidated financial
statements do not purport to represent the realizable or settlement values. The
Company has suffered recurring operating losses and had diminishing working
capital liquidity at December 31, 2002. As a result of these factors, the
Company's independent certified public accountants have expressed substantial
doubt about the Company's ability to continue as a going concern. The Company
believes that its efforts to further reduce costs and operate more efficiently
will generate improved cash flows, although there can be no assurances that such
efforts will be successful. Furthermore, during early 2002 the Company
experienced a significant drop in orders from its key retail customers. As a
result, the Company's revenues in 2002 have experienced a significant decline.
The Company is attempting to increase revenues through various means, including
expanding brands and product offerings, new marketing programs, and direct
marketing to customers through direct response programs. To the extent that the
Company is unable to replace such revenues on a timely basis, the Company's
revenues for future periods may continue to be depressed and the Company's
liquidity and ability to continue to conduct operations may be impaired.
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 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 other than it's existing bank lines of credit. 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 cease or curtail some or all
of Company operations, the exact nature of which cannot be predicted at this
time.
Page 11 of 28
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. Over the past five (5) years Adams Golf Co., Orlimar
Golf Company and Cleveland Golf have become competitive factors in fairway woods
and drivers.
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
Page 12 of 28
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 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
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, epidemics 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.
Dependence on a Few Major Customers. Currently, the Company is dependent
on approximately twenty-five percent (25%) of its business from two (2) major
customers. There is also the risk that the termination of the relationship with
one or all of these customers cease their relationship with the Company could
have an adverse affect on the Company's business.
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
Page 13 of 28
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 (on and off course
retailers) 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. 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 plans 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 H. Pocklington, Michael A. Piraino, Donald A.
Anderson and Chris Holiday, the loss of whose services could significantly
Page 14 of 28
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 of the
other key personnel, except for Mr. Piraino, Mr. Anderson and Mr. Holiday, 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.
Mr. Anderson's employment contract has been extended through 2007. Mr.
Piraino's and Mr. Holiday's employment contracts are at-will.
In addition, exclusively the officers and directors of the Company will
make all decisions with respect to the management 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.
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
Page 15 of 28
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.
Cash Dividends Unlikely. The Company has never declared or paid dividends
on its Common Stock and currently does not anticipate or intend to pay cash
dividends on its Common Stock in the future. The payment of any such cash
dividends in the future will be subject to available retained earnings and will
be at the discretion of the Board of Directors.
Item 2: Properties
The Company leases an 11,000 square foot facility located in Huntington
Beach, CA under the terms of a 5-year lease, expiring July 31, 2005. The lease
contains no renewal options and calls for monthly payments of approximately
$7,700. The Company believes that its facilities are adequate to maintain its
existing business activities.
Executive Officers of the Registrant
The following table and text sets forth the names and ages of all directors
and executive officers of the Company as of March 21, 2003:
Name Age Position
---- --- --------
Peter H. Pocklington 60 Chairman of the Board
Donald A. Anderson 52 Director, Founder and Chief
Executive Officer
Michael A. Piraino 49 Director, President, Chief Operating
Officer and Chief Financial Officer
Chris Holiday 55 Senior Vice-President of Sales and
Marketing
Daniel Wright 46 Vice-President Finance and Chief
Accounting Officer
Robert Williams 51 Director
Dean Reinmuth 52 Director
Roger Miller 65 Director
Peter H. Pocklington, Chairman of the Board
Mr. Pocklington, a Canadian citizen, began his business career as the owner
of a successful Ford dealership in Ontario, Canada. By 1975 Mr. Pocklington
became the largest Ford dealer in Canada with business interests generating over
Page 16 of 28
$100,000,000 in annual sales. Throughout the 1970's and 1980's Mr. Pocklington
invested in real estate and, by 1985, had accumulated substantial real estate
assets. In addition from 1977 to 1998, he owned and operated one of the most
successful sports franchises in history, the Edmonton Oilers Hockey Team that
won five (5) Stanley Cups. In 1983 Mr. Pocklington ran unsuccessfully for
national political office in Canada. Over the past few years he has made
investments and actively participates in the management of in GolfGear
International, Inc. and Meditron Medical, Inc. (a Canadian Corporation). Mr.
Pocklington is very active in charity work.
Donald A. Anderson, Director, Founder and Chief Executive Officer
Mr. Anderson has been in the golf business for his entire adult life. He
taught golf at his home course at 19, and played as golf professional in local
events. In 1973, Mr. Anderson became director of sales and marketing of
R.A.C.O. Manufacturing, a foundry in Whittier, California, which produced
putters for nearly every major golf club maker in the industry, including the
Ben Hogan Company, Spalding, Wilson Sporting Goods, MacGregor, H and B,
Northwestern Golf and Pinseeker. In 1980, Mr. Anderson moved to Chicago to
become director of sales for the Northwestern Golf Club Company, which at the
time was the world's largest exclusive manufacturer of golf clubs. While at
Northwestern, Mr. Anderson pioneered the development and introduction of the
original metal wood, and worked to engage several touring professionals to the
staff. Mr. Anderson signed Nancy Lopez, Tom Weiskopf, Jim Thorpe, Judy Rankin,
Marlene Hagge, Tom Shaw, Bob Murphy, J. C. Snead, George Low and Hubert Green.
In 1986, Mr. Anderson became a consultant for Slotline Golf Company. In 1987,
Mr. Anderson became vice president of the Stan Thompson Golf Club Company, a
50-year-old manufacturer of golf clubs. After completing a three-year contract
at Stan Thompson, Mr. Anderson founded the Company in December 1989.
Michael Piraino, President, Chief Operating Officer, Chief Financial Officer and
Director
Mr. Piraino was most recently Founder and CEO of CEO Resources LLC, an
executive management resources company providing interim CEO services, merger
and acquisition and capital funding advisory services to clients. Prior to
that, Mr. Piraino was the President and Chief Operating Officer of
Enfrastructure Inc., a flexible office space and provider of integrated IT
products and services.
Prior to joining Enfrastructure, Mr. Piraino was the President and Chief
Executive Officer of Emergent Information Technologies, Inc., a management
consulting and competitive strategy services company. Prior to joining Emergent,
he served as Executive Vice President and Head of Corporate Development at Data
Processing Resources Corporation, an information technology staffing and
solutions company. Mr. Piraino earned a B.S. degree in accounting from Loyola
University of Los Angeles. He is a Certified Public Accountant and a member of
the American Institute of Certified Public Accountants.
Chris Holiday, Senior Vice-President of Sales and Marketing
Mr. Holiday has extensive experience in the golf industry. Most recently
he spent 11 years with Callaway Golf, the largest and most successful company in
the golf industry where he was Senior Vice-President of U.S. Sales. At Callaway
he was responsible for over $500,000,000 is sales and served as a member of the
executive management team setting overall strategic direction for the Company.
Prior to that he owned a successful chain of golf retail stores in Colorado
earning honors as one of the Top 20 golf retail operations in America. Prior to
that Mr. Holiday was a senior auditor at the national accounting firm of Arthur
Anderson & Company.
Daniel Wright, Vice President of Finance
Mr. Wright has over ten (11) years of controller/CFO experience in the golf
industry. He began his career in the golf industry with Tru-Form Golf as their
controller. Tru-Form Golf was a manufactured clubs and accessories under the
house brand name for the Nevada Bob retail chain. After more then four (4)
years with Tru-Form Golf, Mr. Wright joined Grip Technology, Inc., a publicly
traded company, ("GTI") as their controller and CFO. GTI manufactured golf
grips for both OEMs and retail outlets. GTI filed for bankruptcy in 1999. From
May of 2001 to October 2002, Mr. Wright was the Chief Financial Officer for the
Company. From October 2002 to the present Mr. Wright has been Chief Accounting
Officer. In addition to Mr. Wright's golf industry experience he has a B.A. in
Accounting from National University and several years experience with local
accounting firms.
Page 17 of 28
Robert Williams, Director
Mr. Williams has worked in the golf industry since 1976. He has been
involved in design, production, and sales of all types of golf equipment and
accessories for over 25 years. He was a former salesman for Northwestern Golf
Company, President of Palm Springs Golf Company, Owner of Confidence Golf
Company, and also former owner of 2 retail stores, Pro Golf Discount of Mission
Viejo and National Golf Warehouse in Palm Desert, Ca. He is currently a golf
club designer and has designed golf clubs for such companies as Spalding, Lynx,
Nicklaus/Golden Bear, Ben Hogan Golf, MacGregor Golf, Ram Golf, Arnold Palmer
and many others. He has served as a director of the company since 2001.
Roger Miller, Director
Mr. Miller is a retired businessman with over 40 years of experience.
Dean Reinmuth, Director
With a lifelong love of the game of golf, Dean Reinmuth has emerged as one
of the most sought after and respected golf instructors in the world today. Mr.
Reinmuth is a spokesperson for his own company and represents Como Sportswear,
the Company, Golf IQ and Softrack. He is credited with developing and marketing
the best selling instructional video, "Take a Swing at Tension," and released
his first book Tension Free Golf in 1995. His media credits also include
co-hosting television commentary segments for the PGA Tour where he is a regular
on Golf Channel Academy Live. He is the host of his own series on Golf Channel
Academy since 1996, as well as a professional advisory staff member for Golf
Digest and a regular contributor of articles for various golf trade magazines
and international golf consumer magazines.
As an instructor, Dean Reinmuth is most recognized for developing his
"Swing Shaping System." Two of his first students were top-ranked junior players
in the San Diego area. In addition, he taught the PGA Section Player of the Year
from the San Diego area as well as a professional golfer who qualified for the
U.S. Open twice. His success with these players led him to work with Phil
Mickleson. Credited with developing Phil's game since age 14, Dean Reinmuth
worked with him through Mickleson's high school and college and professional
ranks. Today Dean is recognized as one of the Top 50 Golf Instructors in the
U.S. by Golf Magazine and continues to work with several prominent players on
the PGA, LPGA, European, Nationwide and Canadian tours.
Item 3: Legal Proceedings
Recent Litigation and Settlement
On November 17, 2001, MC Corporation, a Japanese corporation, filed an
action against GolfGear International, Inc. (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 that, 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.
Page 18 of 28
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 provided that the Company issue a total of
3,000,000 shares of Common Stock to MC Corporation and such shares have been
reflected as issued and outstanding in the Company's financial statements at
December 31, 2002. The 3,000,000 shares of Common Stock consisted 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. 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 provided that MC Corporation's representative on the Company's
Board of Directors resign, and the Company's distribution agreement with MC
Corporation be 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 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock is traded on Nasdaq's Over the Counter Bulletin
Board using the symbol "GEAR". The following table sets forth the first quarter
of 2003, 2002 and 2001 high and lows sales prices of the Company's Common Stock
as reported on Nasdaq for the periods indicated.
High Low
----- -----
Year Ending December 31, 2003
First Quarter $0.19 $0.26
Year Ended December 31, 2002
First Quarter $0.27 $0.02
Second Quarter $0.70 $0.17
Third Quarter $0.45 $0.20
Fourth Quarter $0.31 $0.14
Year Ended December 31, 2001
First Quarter $0.33 $0.21
Second Quarter $0.23 $0.18
Third Quarter $0.19 $0.07
Fourth Quarter $0.05 $0.01
Year Ended December 31, 2002
First Quarter $0.19 $0.26
As of March 20, 2003, there were approximately 194 holders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock and has
no present intention of doing so.
Page 19 of 28
Item 6: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Annual Report on Form 10-KSB for the year ended December 31, 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 Annual Report
on Form 10-KSB for the year ended December 31, 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 inter-company transactions and balances have been
eliminated in consolidation.
The Company is attempting to increase revenues through various means,
including expanding product offerings, new marketing programs, and the
production of on a direct response program, 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 $2,300,00 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
Years Ended December 31, 2002 and 2001
Net sales decreased to $1,546,234 in 2002 from $2,143,371 in 2001,
a decrease of $597,137 or 27.9%. Several key events led to the reduction in
sales. Initially the shortage of working capital in the third and fourth
quarters of 2001 delayed the production of inventory resulting in the loss of
some customer sales in the first quarter of 2002. These initially lost sales
resulted in the loss of re-orders significantly affecting the Company's second
and third quarter sales. The Company also terminated two of its key foreign
distributors. Historically foreign sales have always been a significant
Page 20 of 28
component of the Company's total sales. The Company is in current negotiations
to replace both these of these distributors. Domestic sales were adversely
affected by the loss of a major customer due to a change in ownership. The
decision by the United States Golf Association (USGA) not to set new equipment
standards for spring-like effect contributed to customer confusion and reduced
sales throughout the industry. These standards or rules state that the
coefficient of restitution (COR) is not to exceed 0.830, but had indicated that
the rule might change. The Company delayed product development and the
production of inventory until it was certain that its product would be
conforming to with all USGA rules and regulations.
Gross profit decreased to $260,024 in 2002 from $937,762 in 2001, and
decreased as a percentage of net sales to 16.8% in 2002 from 43.8% in 2001. As
the Company continues to redesign its product line and incorporate new
technology it has chosen to provide reserves against certain obsolete inventory
(a total of $195,443 for 2002). As the retail prices of the Company's
competitor's products continue to decline the Company has been forced to reduce
it's pricing to remain competitive and maintain its market share. Historically
the Company has had gross margins in the forty percent range. In order to
maintain these margins the Company will have to maintain its current pricing
levels, reengineer its processes and negotiate better pricing from its
suppliers.
Selling and marketing expenses increased to $553,971 in 2002 (35.8% of
sales) from $326,825 in 2001 (15.2% of sales), an increase of $227,146 or 69.5%.
In 2002 the Company initiated a number of new sales and marketing plans.
Initially the expenses associated with the plans were disproportionate to the
current level of sales. During the year the Company incurred increased expenses
for consultants, travel, advertising, and marketing which should result in
greater sales activity in the future.
Tour and pro contract expenses decreased to $93,101 in 2002 (6.0% of sales)
from $108,401 in 2001 (5.1% of sales), a decrease of $15,300 or 14.1%. Tour and
pro contract expenses decreased in 2002 as compared to 2001 as a result of the
previous contracts expiring and the Company opting not to renew them.
Bad debt expense decreased to $53,899 in 2002 from $149,945 in 2001, a
decrease of $96,046 or 64.1%. The decrease is due to tighter credit policies
and an increased effort to collect accounts in a timelier manner.
General and administrative expenses increased to $1,452,742 in 2002 (94.0%
of sales) from $1,074,972 in 2001 (50.2% of sales), a 35.1% increase or
$377,770. In 2002 the Company added some new key personnel resulting increased
salaries and related fringe benefits. In addition the company had increased
insurance and legal expenses. The increase in legal expenses was a result of an
action taken by a major shareholder and former distributor now settled and the
expense associated with an unsuccessful offering, including the payment of
$25,000 to secure a mutual release.
Depreciation and amortization decreased to $48,578 in 2002 from $115,539 in
2001, a decrease of $66,961 or 60.6%. The decrease is a result of the write off
of goodwill and certain other tangible assets at December 31, 2001.
Interest expense increased to $2,402,528 in 2002 from $17,259 in 2001. The
primary reason for the increase expense was the issuance of the convertible
debentures including the amortization of the finder's fees, and the imputed
value of the associated the beneficial conversion feature of the options and
warrants which resulted in non-cash interest expense charges of $2,100,000. The
convertible debentures were issued in June of 2002 and they bear interest at
seven percent (7%). The sale of the debenture resulted in $516,054 in
capitalized financing costs. These costs are being amortized over the 18-month
life of the debenture. The imputed beneficial conversion of the options and
warrants were $1,102,897 and $997,103 respectively. These imputed amounts have
been fully amortized to interest expense by the date of earliest conversion
December 6, 2002.
Net loss was $4,272,673 for 2002, as compared to a net loss of $1,016,981
for 2001, an increased loss of $3,255,694. The increased net loss includes more
than $2,380,000 of additional interest expense (including non-cash interest
expense charges of $2,100,000), $195,443 in obsolete inventory adjustments and
$604,000 in increased selling and administrative expenses some of which will be
nonrecurring.
Net Loss Applicable to Common Stockholders. During 2001, the Company
recorded preferred stock dividends of $110,704, 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.
Page 21 of 28
Liquidity and Capital Resources
The consolidated financial statements as of and for the year ended December
31, 2002 have been prepared assuming that the Company will continue as a going
concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The carrying amounts of assets
and liabilities presented in the consolidated financial statements do not
purport to represent the realizable or settlement values. The Company has
suffered recurring operating losses and requires additional financing to
continue operations. For the year ended December 31, 2002 the Company incurred
losses from operations of $1,942,267 and a net loss of $4,272,673 and used cash
in operating activities of $2,352,375 and as of December 31, 2002 had a working
capital deficit of $2,733,139 and a stockholders' deficit of $1,608,984. As a
result of these factors, there is a substantial doubt about the Company's
ability to continue as a going concern.
The Company is attempting to increase revenues through various means,
including expanding brands and product offerings, new marketing programs, and
possibly direct marketing to customers, subject to the availability of operating
working capital resources. To the extent that the Company is unable to increase
revenues in 2003, the Company's liquidity and ability to continue to conduct
operations may be impaired.
The Company will require substantial additional capital to fund operating
requirements. The Company is exploring various alternatives to raise this
required capital, including convertible debentures, private infusion of equity
and various collateralized debt instruments, 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. The Company may also be required to consider a formal
or informal restructuring or reorganization.
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. One bank line of credit is
secured by eligible accounts receivable and has a maximum borrowing level of
$250,000, which expires December 2003. The other is an unsecured revolving
credit line and has a maximum borrowing level of $70,000. The Company is
actively seeking an investment of additional capital. 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.
Operating Activities. The Company's operations utilized cash of $2,352,375
during the year ended December 31, 2002, as compared to cash of $5,393 provided
during the year ended December 31, 2001. The increase in cash utilized in
operating activities in 2002 as compared to 2001 was primarily a result of
reduced sales levels, lower gross margins and higher then normal sales marketing
expenses. At December 31, 2002 cash was $117,018 representing a decrease of
$3,117, as compared to $120,135 at December 31, 2001. The Company had working
capital deficit of $2,733,139 at December 31, 2002, as compared to working
capital deficit of $390,171 at December 31, 2001, reflecting current ratios of
0.26:1 and 0.75:1 at December 31, 2002 and December 31, 2001, respectively.
Investing Activities. During the year ended December 31, 2002 and 2001,
net cash used in investing activities was $31,981 and $7,618, respectively.
Financing Activities. The Company completed an agreement with Wyngate
Limited, a Jersey Limited Company, which included the sale of fifteen million
(15,000,000) shares of Common Stock at Seven and One-Half Cents ($0.075) per
share, for an aggregate purchase price of One Million One Hundred Twenty-Five
Thousand Dollars ($1,125,000), paid by Two Hundred Thousand Twenty-Five Dollars
($200,025) in cash and a promissory note due and payable eighteen (18) months
from the date thereof in the principal amount of Nine Hundred Twenty-Four
Thousand Nine Hundred Seventy-Five Dollars ($924,975). The promissory note was
secured pursuant to a stock pledge agreement that pledged 12,333,000 shares of
the Common Stock, which were held by the Company as security for payment of the
promissory note. See amendment to the stock pledge agreement below. Upon the
Page 22 of 28
closing of this offering, Wyngate Limited, and its President, Peter H.
Pocklington, gained control of the Company and obtained the right to appoint a
majority of the board of directors. As a requirement of the transaction Peter
H. Pocklington was made Chairman of the Board. The agreement also gives Mr.
Pocklington the right to merge the Company with his medical products company in
a reverse merger at a price of Twenty-Five Cents ($.25) per share of Common
Stock. The value of the medical products company shall be determined by
obtaining a fairness opinion from a reputable investment-banking firm.
During the fourth quarter of 2002, Mr. Pocklington loaned the Company
$200,000 in exchange for an amendment to the stock pledge agreement to release
9,029,518 shares of Common Stock held by the Company as security for payment of
the promissory note. The promissory note remains collateralized by 3,303,482
shares of Common Stock to secure the unpaid balance of the promissory notes less
the loan to the Company. The loan bears interest at 9 1/2% and is due on April
20, 2003. The Company's board of directors unanimously approved the transaction
by written consent on November 20, 2002
During the year ended December 31, 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 Company's patents secure
the debentures. 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
deferred financing 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.
As of December 31, 2002 the Company has borrowed $70,894 under its secured
line of credit arrangements with banks. Borrowing availability under all the
Company's lines of credit was $231,876 at December 31, 2002.
On December 16, 2002 the Company's board of directors approved a
modification to the warrants whereby the holder, without the prior conversion of
the debenture, could exercise the warrant. As a result of the modification to
the warrants, in the first quarter of 2003 debenture holders exercised 2,800,000
warrants at $.10 per share resulting in the issuance of 2,800,000 shares of
Common Stock for $280,000 in gross proceeds.
Funds from these transactions have been used for working capital, sales and
marketing, tour promotion, inventory purchases, accounts payable, patent
development, completion of the direct response program and general operating
expenses.
Critical Accounting Policies
The Company's 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.
Allowance for Doubtful Accounts - The Company makes periodic evaluations of
the creditworthiness of its customers and generally does not require collateral.
As of the balance sheet dates presented, management has determined that an
adequate provision has been made for doubtful accounts.
Inventories - Inventories consist of materials, labor and manufacturing
overhead and are stated at lower of cost (first-in, first-out) or market. The
Company periodically reviews its inventory to evaluate it for discontinued and
obsolete products. The difference between the market value of products and their
cost is either written off as a direct charge to cost of goods sold or included
in the reserve allowance. The loss from the liquidation or destruction of
obsolete and discontinued inventory is applied against the reserve allowance.
Page 23 of 28
Revenue Recognition - Revenue is recognized in accordance with SAB No. 101
"Revenue Recognition in Financial Statements". Sales of products are recognized
when the products are shipped from the Company's facility. The Company generally
provides a lifetime warranty against defects. The Company makes a provision for
warranty costs in the period of sale. The Company periodically reviews the
adequacy of the accrued product warranties.
The Company has a direct response program in production. Prepaid marketing
costs are capitalized as incurred then amortized to expense on a
cost-pool-by-cost-pool basis over the period during which the future benefits
are expected to be received.
The Company has obtained $2,100,000 financing through convertible
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 Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and SFAS no. 142 "Goodwill and Other
Intangible Assets". SFAS No. 141 prospectively prohibits the pooling-of interest
method and requires the purchase method of accounting for business combinations
initialed after June 30, 2001. SFAS No. 142 requires companies to cease
amortizing goodwill that exists at the date of adoption. Any goodwill resulting
from acquisitions completed after June 30, 2001 will not be amortized. SFAS No.
142 also establishes a new method of testing goodwill and other intangible
assets for impairment on an annual basis or an interim basis if an event occurs
or circumstances change that would reduce the fair value of a reporting unit
below its carrying value. The Company effectively adopted these standards as of
January 1, 2002. No impairments were recorded in 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of "Long-Lived Assets", which supersedes previous
guidance on Financial accounting and reporting for the impairment or disposal of
long-lived assets and for segments of a business to be disposed of. This
Standard supersedes SFAS no. 121 and portions of APB Opinion No. 144 did not
have a significant impact on the Company's financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3: "Liability Recognition for certain Employee Termination
Benefits and Other Cost to Exit an Activity (including Certain Costs Incurred in
a Restructuring)". SFAS No. 146 requires that a liability be recognized for
those costs only when the liability is incurred, that is, when it meets the
definition of a liability in the FASB's conceptual framework, SFAS No. 146 also
establishes fair value as the object for initial measurement of liabilities
related to exit or disposal activities. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
adoption encouraged. Management does not expect the adoption of SFAS No. 146
will have a material impact on the Company's financial position or results of
operations.
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transaction and Disclosure." SFAS No. 148 amends SFAS No 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based compensation. It also amends
the disclosure requirements of SFAS No. 123. If an entity elects to adopt the
recognition provisions of the fair value based method of accounting for
stock-based compensation in a fiscal year beginning before December 16, 2003,
that change in accounting principle shall be reported using either the (i)
prospective method, (ii) the modified prospective method, or (iii) the
retroactive restatement method as defined in SFAS No. 148. SFAS No. 148 is
effective for fiscal years ending after December 15, 2002. Since the Company has
elected to continue accounting for stock-based compensation under APB No. 25,
the adoption of SFAS no. 148 has had no impact to the Company's Financial
position or results of operations. The Company's financial statement disclosures
have been designed to conform to the new disclosure requirements prescribed by
SFAS No. 148.
Page 24 of 28
Item 7. Financial Statements
The consolidated financial statements are listed at the "Index to
Consolidated Financial Statements" elsewhere in this document.
Item 8: Financial Statement and Supplementary Data
The financial information required by Item 8 is incorporated by reference
to the consolidated financial statements and notes thereto as an exhibit in Part
IV, Item 15.
Item 9: Changes and Disagreements with Accountants on Accounting and on
Financial Disclosure
There have been no disagreements with the Company's independent accounts on
accounting or financial disclosure.
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on June 27, 2003.
Item 11: Executive Compensation
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on June 27, 2003.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on June 27, 2003.
Item 13: Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on June 27, 2003.
Item 14: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of
this report, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities Exchange Commission rules and forms.
b) Changes in Internal Controls
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the disclosure controls
subsequent to the Chief Executive Officer's and Chief Financial Officer's most
recent evaluation, and there have been no corrective actions with regard to
significant deficiencies and material weaknesses in such controls.
Page 25 of 28
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents
(1) Financial Statements
Statement of Management's Responsibility for Financial Statement
Report of Independent Accountants
Consolidated Statements of Operation for the two years ended December 31,
2002 and 2001
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Stockholder Equity (Deficit) as December 31,
2002 and 2001
Consolidated Statements of Cash Flows for the two years ended December 31,
2002 and 2001
Notes to Consolidated Financial Statements
All other schedules call for under Regulation S-X are not submitted because they
are not applicable or not required, or because the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K
(1) 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.
(2) 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").
(3) 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's patents secure the
debentures. 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.
(4) 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
(c) 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 (MC
Corporation)(1)
4.4 Certificate of Determination (1)
10.1 Distribution Agreement (MC Corporation)(1)
10.10 GolfGear International, Inc. 1997 Stock Incentive Plan (1)(C)
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)
Page 26 of 28
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)
10.22 Employment Agreement (Michael A. Piraino) (4)
10.23 Employment Agreement (Donald A. Anderson) (4)
10.24 Loan Agreement (Peter H. Pocklington) (4)
10.25 Employment Agreement (Chris Holiday) (4)
10.26 Attorney Fee Agreement (Fulbright & Jaworski LLP) (4)
21 Subsidiaries of the Registrant (1)
99.1 Patents (1)
99.2 Trademarks (1)
99.3 Certifications Pursuant to Sarbanes-Oxley Act of 2002 (4)
Footnotes:
(1) Previously filed as an Exhibit to the Company's Registration Statement
on Form 10-SB dated November 11, 1999, and incorporated herein by
reference.
(2) Previously filed as an Exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999, and incorporated
herein by reference.
(3) Previously filed as an Exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2000, and incorporated
herein by reference.
(4) Filed herein.
(5) Previously filed as Exhibits to the Company's Report on Form 8-K dated
April 15, 2002.
Page 27 of 28
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of GolfGear International, Inc.:
Management, who accepts full responsibility for their integrity and
objectivity, prepared the consolidated financial statements and accompanying
information. The statements were prepared in conformity with generally accepted
accounting principles in the United States and, as such, include amounts that
are based on management's best estimates and judgments.
Management is further responsible for maintaining a system of internal
accounting control designed to provide reliable financial information for the
preparation of financial statements, to safeguard assets against loss or
unauthorized used and to ensure that transactions are executed consistent with
Company policies and procedures. Management believes that existing internal
accounting control systems are achieving these objectives and provide
reasonable, but not absolute, assurance concerning the accuracy of the financial
statements.
The Board of Directors, through its Audit Committee, which consists solely
of outside directors, exercises oversight of management's financial reporting
and internal accounting control responsibilities. The Committee meets
periodically with financial management and the independent accountants to obtain
reasonable assurance that each is meeting its responsibilities and to discuss
matters concerning auditing, internal accounting control and financial
reporting. The independent accountants have free access to meet with the Audit
Committee without management's presence.
/s/ Peter H. Pocklington
Peter H. Pocklington
Chairman of the Board
/s/ Donald A. Anderson
Donald A. Anderson
Chief Executive Officer and Founder
/s/ Michael A Piraino
Michael A. Piraino
President, Chief Operating Officer and Chief Financial Officer
/s/ Daniel S. Wright
Daniel S. Wright
VP Finance and Chief Accounting Officer
Page 28 of 28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheets at December 31, 2002 and 2001 . . . . . . . . . .F-2
Consolidated Statements of Operations
for the years ended December 31, 2002 and 2001. . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2002 and 2001 . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2002 and 2001. . . . . . . . . . . . . .F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . .F-9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
GolfGear International, Inc.:
We have audited the accompanying consolidated balance sheets of GolfGear
International, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in these financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GolfGear International, Inc. and subsidiaries as of December 31, 2002 and 2001,
And the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has incurred recurring
operating losses and requires additional financing to continue operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that may result should the Company
be unable to continue as a going concern.
GOOD SWARTZ BROWN & BERNS LLP
Los Angeles, California
March 21, 2003
F-2
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 and 2001
2002 2001
------------- ------------
ASSETS
Current assets:
Cash $ 117,018 $ 120,135
Accounts receivable, net of allowance for doubtful
accounts of $99,079 and $78,337, respectively 302,216 335,755
Inventories 492,904 691,265
Prepaid expenses 58,053 22,450
------------- ------------
Total current assets 970,191 1,169,605
Property and equipment, net of accumulated depreciation 98,740 128,754
Other assets:
Patents and trademarks, net of accumulated amortization 100,515 83,922
Deferred financing costs 315,366 -
Prepaid marketing costs and other assets 609,534 12,400
------------- ------------
Total assets $ 2,094,346 $ 1,394,681
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 967,108 $ 1,127,427
Accrued product warranties 116,102 101,593
Accrued interest payable 89,449 8,438
Bank line of credit 70,894 57,100
Notes payable to stockholders 200,000 97,166
Notes payable, current portion 83,177 69,091
Convertible debentures 2,100,000 -
Deferred licensing revenue 75,000 -
Other current liabilities 1,600 98,961
------------- ------------
Total current liabilities 3,703,330 1,559,776
Notes payable, net of current portion - 50,000
Stockholders' deficit:
Common stock, $.001 par value; authorized
- 50,000,000 shares; issued and outstanding
- 34,856,154 shares and 17,989,454 shares, respectively 34,856 17,989
Additional paid-in capital 12,808,763 8,901,273
Common stock purchase receivable note (945,164) -
Deferred compensation (100,409) -
Accumulated deficit (13,407,030) (9,134,357)
------------- ------------
Total stockholders' deficit (1,608,984) (215,095)
------------- ------------
Total liabilities and stockholders deficit $ 2,094,346 $ 1,394,681
============= ============
See notes to consolidated financial statements.
F-3
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001
2002 2001
------------ ------------
Sales, net $ 1,546,234 $ 2,143,371
Cost of goods sold 1,286,210 1,205,609
------------ ------------
Gross profit 260,024 937,762
Operating Expenses:
Selling and marketing 553,971 326,825
Tour and pro contracts 93,101 108,401
Bad debt expense 53,899 149,945
General and administrative 1,452,742 1,074,972
Depreciation and amortization 48,578 115,539
Write-off of goodwill - 150,385
------------ ------------
Total operating expenses 2,202,291 1,926,067
Loss from operations (1,942,267) (988,305)
Other income (expense):
Gain on settlement of old accounts payable 69,654 -
Interest income 29,237 774
Interest expense:
Beneficial conversion feature on convertible debt (non-cash) (1,102,897) -
Fair value of warrants issued with convertible debt (non-cash) (997,103) -
Interest at stated borrowing rates (302,528) (17,259)
------------ ------------
(2,402,528) (17,259)
------------ ------------
Other expenses (26,769) (12,191)
------------ ------------
Net loss $(4,272,673) $(1,016,981)
============ ============
Net loss applicable to common stockholders:
Net loss $(4,272,673) $(1,016,981)
Less dividends on convertible preferred stock - (110,704)
------------ ------------
Net loss applicable to common stockholders: $(4,272,673) $(1,127,685)
============ ============
Loss per common share - basic and diluted $ (0.14) $ (0.07)
============ ============
Weighted average number of common shares outstanding
- basic and diluted 30,283,779 15,983,673
============ ============
See notes to consolidated financial statements.
F-4
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002 AND 2001
Preferred Stock Common Stock
-------------------- -------------------------------- Additional Deferred
Shares Amount Shares Amount Paid-in Capital Compensation
---------- -------- ---------------- -------------- ----------------- --------------
Balance, December 31, 2000 233,228 $ 233 15,273,598 $ 15,274 $ 8,728,436 $ -
Issuance of common stock
for services 265,556 265 64,350
Preferred stock dividend 11,802 12 110,692
Conversion of preferred stock (245,030) (245) 2,450,300 2,450 (2,205)
Net loss
---------- -------- ---------------- -------------- ----------------- --------------
Balance, December 31, 2001 - - 17,989,454 17,989 8,901,273 -
--------------
Cancellation of stock (100,000) (100) 100
Issuance of stock for the reset
provision in the conversion
of the Preferred stock 549,700 550 (550)
Issuance of stock for the
acquisition of Lazereye's assets 100,000 100 27,900
Issuance of stock for services 195,000 195 51,655
Issuance of stock for finders fees 1,072,000 1,072 266,928
Issuance of warrants for finders fees 218,120
Sale of common stock 15,000,000 15,000 1,110,000
Interest income on stock purchase note
Exercise of options 50,000 50 450
Options issued to employees
at below fair-market value 13,750
Beneficial conversion feature
of convertible debentures 1,102,897
Fair value of warrants issued
with convertible debentures 997,103
Deferred compensation for
options granted to non-employees 119,137 (119,137)
Amortization of deferred compensation 18,728
Net loss for the year
---------- -------- ---------------- -------------- ----------------- --------------
Balance, December 31, 2002 $ - $ - 34,856,154 $ 34,856 $ 12,808,763 $ (100,409)
========== ======== ================ ============== ================= ==============
Common Stock
Purchase Receivable Accumulated
Note Deficit Total
--------------------- ------------- -----------
Balance, December 31, 2000 $ - $ (8,006,672) $ 737,271
Issuance of common stock
for services 64,615
Preferred stock dividend (110,704) 0
Conversion of preferred stock 0
Net loss (1,016,981) (1,016,981)
--------------------- ------------- -----------
Balance, December 31, 2001 - (9,134,357) (215,095)
Cancellation of stock -
Issuance of stock for the reset
provision in the conversion
of the Preferred stock -
Issuance of stock for the
acquisition of Lazereye's assets 28,000
Issuance of stock for services 51,850
Issuance of stock for finders fees 268,000
Issuance of warrants for finders fees 218,120
Sale of common stock (924,975) 200,025
Interest income on stock purchase note (20,189) (20,189)
Exercise of options 500
Options issued to employees
at below fair-market value 13,750
Beneficial conversion feature
of convertible debentures 1,102,897
Fair value of warrants issued
with convertible debentures 997,103
Deferred compensation for
options granted to non-employees -
Amortization of deferred compensation 18,728
Net loss for the year (4,272,673) (4,272,673)
--------------------- ------------- -----------
Balance, December 31, 2002 $ (945,164) $(13,407,030) $(1,608,984)
===================== ============= ===========
See notes to consolidated financial statements.
F-5
GOLFGEAR INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND2001
2002 2001
------------ ------------
Cash Flows From Operating Activities
Net loss $(4,272,673) $(1,016,981)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Beneficial conversion feature of convertible debentures 1,102,897 -
Fair value of warrants with convertible debentures 997,103 -
Amortization of deferred compensation 18,728 -
Depreciation and amortization 48,578 115,539
Accrued interest (20,189) -
Provision for obsolete inventory 195,443 -
Amortization of deferred financing costs 200,688 -
Write-off of goodwill 150,385
Provision for bad debts 53,899 149,945
Gain on settlement of accounts payable (69,654) -
Stock options issued to employees below market value 13,750 64,615
Loss on disposal of asset 24,824 -
Fair value of stock or options issued to non-employees 31,850 12,191
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (20,360) 4,355
Inventories 2,918 264,711
Prepaid expenses (35,603) 42,367
Prepaid marketing costs (601,764)
Other 4,630 4,706
Increase (decrease) in:
Accounts payable and accrued expenses (90,665) 152,275
Accrued product warranties 14,509 19,713
Accrued interest payable 81,011 5,701
Deferred revenue 75,000 -
Other (107,295) 35,871
------------ ------------
Net cash provided by (used in) operating activities (2,352,375) 5,393
------------ ------------
Cash Flows From Investing Activities
Purchases of property and equipment (31,981) (7,618)
------------ ------------
Cash Flows From Financing Activities
Proceeds from sale of convertible debentures 2,100,000 -
Decrease in notes payables (35,914) -
Increase in notes payable to stockholders 102,834 57,511
Borrowings under bank line 26,253 51,929
Repayments of borrowings under bank line (12,459) (17,807)
Sale of common stock and exercise of options 200,525 (9,027)
------------ ------------
Net cash provided by (used in) financing activities 2,381,239 82,606
------------ ------------
Net Increase (Decrease) in Cash (3,117) 80,381
Cash at the Beginning of Period 120,135 39,754
------------ ------------
Cash at the End of Period $ 117,018 $ 120,135
============ ============
Continued
See notes to consolidated financial statements.
F-6
GOLFGEAR INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND2001 (continued)
CASH PAID FOR INTEREST
Interest $ 8,392 $ 4,109
======== ========
Supplemental disclosures of non-cash investing and financing
activities:
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of preferred shares for payment of dividend $ - $110,704
======== ========
Deferred financing costs $516,054 $ -
======== ========
Prepaid marketing costs $ 20,000 $ -
======== ========
Deferred compensation $119,137 $ -
======== ========
Issuance of common stock for the asset purchase of Lazereyes $ 28,000 $ -
======== ========
See notes to consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 and 2001
1. LIQUIDITY AND GOING CONCERN
The consolidated financial statements as of and for the year ended December
31, 2002 have been prepared assuming that the Company will continue as a
going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the consolidated financial
statements do not purport to represent the realizable or settlement values.
The Company has suffered recurring operating losses and requires additional
financing to continue operations. For the year ended December 31, 2002 the
Company incurred losses from operations of $1,942,267 and a net loss of
$4,272,673 and used cash in operating activities of $2,352,375 and as of
December 31, 2002 had a working capital deficit of $2,733,139 and a
stockholders deficit of $1,608,984. As a result of these factors, there is
a substantial doubt about the Company's ability to continue as a going
concern.
The Company is attempting to increase revenues through various means,
including expanding brands and product offerings, new marketing programs,
and possibly direct marketing to customers, subject to the availability of
operating working capital resources. To the extent that the Company is
unable to increase revenues in 2003, the Company's liquidity and ability to
continue to conduct operations may be impaired.
The Company will require additional capital to fund operating requirements.
The Company is exploring various alternatives to raise this required
capital, including convertible debentures, private infusion of equity and
various collateralized debt instruments, 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. The
Company may also be required to consider a formal or informal restructuring
or reorganization.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business - GolfGear International, Inc. and
----------------------------------------
its subsidiaries (collectively, "GolfGear" or the "Company") designs,
develops and markets golf clubs and related golf products.
GolfGear, formerly Harry Hurst, Jr., Inc. ("HHI") was incorporated under
the laws of the State of Nevada on October 9,1997. The Company is the
successor entity resulting from December 5, 1997 reorganization between
GolfGear International, Inc. ("GGI"), which has been active in the golf
business since 1990, and HHI, a non-operating public shell corporation. HHI
changed its name to GolfGear International, Inc., and GGI changed its name
to GGI, Inc. and remains a wholly-owned subsidiary of the Company. Each
share of Common Stock of GGI was exchanged for 3.5235 shares of Common
Stock of HHI. The shareholders of GGI, constituting 90% of the then
outstanding Common Stock, became the controlling shareholders of the
Company. For accounting purposes, the acquisition of GGI by HHI has been
treated as a reverse acquisition of GGI with GGI considered the acquirer.
Segment and Geographic Information - The Company operates in one business
-------------------------------------
segment. The Company sells to customers in the United States, the Far East
and Europe. Sales for the year ended December 31, 2002 to customers in the
United States, and the rest of the world were $1,399,035 and $147,199,
respectively. Sales for the year ended December 31, 2001 to customers in
the United States, and the rest of the world were $1,635,065, and $508,306,
respectively.
Principles of Consolidation - The consolidated financial statements include
----------------------------
the accounts of the Company and its wholly-owned subsidiaries, GGI, Inc.,
GearFit Golf Company, Pacific Golf Holdings, Inc., Bel Air - Players Group,
Inc. and Leading Edge Acquisition, Inc. All intercompany transactions and
balances have been eliminated in consolidation.
F-8
Use of Estimates - The preparation of financial statements in conformity
------------------
with accounting principles generally accepted in the United States of
America 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.
Allowance for Doubtful Accounts - The Company makes periodic evaluations of
--------------------------------
the creditworthiness of its customers and generally does not require
collateral. As of the balance sheet dates presented, management has
determined that an adequate provision has been made for doubtful accounts.
Inventories - Inventories consist of materials, labor and manufacturing
-----------
overhead and are stated at lower of cost (first-in, first-out) or market.
The Company periodically reviews its inventory to evaluate it for
discontinued and obsolete products. The difference between the market value
of products and their cost is either written off as a direct charge to cost
of goods sold or included in the reserve allowance. The loss from the
liquidation or destruction of obsolete and discontinued inventory is
applied against the reserve allowance.
Property and Equipment - Property and equipment are stated at cost.
------------------------
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets that range from five to seven years. Leasehold
improvements are amortized on the straight-line method over the term of the
lease or the useful life of the asset whichever is shorter.
Long-lived Assets- Property and equipment and other long-lived assets are
------------------
reviewed for impairment whenever events or circumstances indicate that the
assets non-discounted expected cash flows are not sufficient to recover its
carrying amount. The Company measures an impairment loss by comparing the
fair value of the asset to its carrying amount.
Patents and Trademarks - Patents and trademarks are being amortized on the
------------------------
straight-line method over the estimated useful life, which vary from two to
17 years. SFAS No. 142 requires companies to cease amortizing goodwill that
exists at the date of adoption. SFAS No. 142 establishes a new method of
testing intangible assets for impairment on an annual basis or an interim
basis if an event occurs or circumstances change that would reduce the fair
value of a reporting unit carrying value. The Company effectively adopted
these standards as of January 1, 2002. No impairments were recorded in
2002.
Deferred Financing Costs - Deferred Financing Costs are amortized over the
-------------------------
life of the convertible debentures on the straight-line basis, which
approximates the effective interest method due to the short maturity of the
debentures.
Fair Value of Financial Instruments - The Company's financial instruments
---------------------------------------
consist of cash, short-term receivables and payables. The carrying value
for all such instruments, considering the terms, approximates fair value at
December 31, 2002 and 2001.
Revenue Recognition - Revenue is recognized in accordance with SAB No. 101
--------------------
"Revenue Recognition in Financial Statements". Sales of products are
recognized when the products are shipped from the Company's facility. The
Company generally provides a lifetime warranty against defects. The Company
makes a provision for warranty costs in the period of sale. The Company
periodically reviews the adequacy of the accrued product warranties.
Shipping Costs - The Company bills shipping costs to its customers. These
---------------
billings have been recognized as revenue and the associated costs have been
recorded as cost of goods sold expenses in accordance with EITF 00-01:
Accounting for shipping and handling fees and costs". Shipping costs billed
in 2002 were not material.
Stock-Based Compensation - The Company periodically issues Common Stock
-------------------------
options and Common Stock purchase warrants to employees and non-employees
in non-capital raising transactions for services rendered and to be
rendered, and as financing costs.
F-9
The Company adopted Statement of Financial Accounting Standards ("SFAS) No.
123, "Accounting for Stock-Based Compensation", which establishes a fair
value method of accounting for stock-based compensation plans.
The provisions of SFAS No. 123 allow companies to either expense the
estimated fair value of stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", but to disclose the pro
forma effect on net loss and net loss per share had the fair value of the
stock options been exercised. The Company has elected to continue to
account for stock-based compensation plans utilizing the intrinsic value
method. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the fair market price of the Company's Common Stock at
the date of grant above the amount an employee must pay to acquire the
Common Stock.
In accordance with SFAS No. 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on
the value or the award and is recognized over the vesting period. The value
of the stock-based award is determined using the Black-Scholes
option-pricing model whereby compensation cost is the excess of the fair
value of the award as determined by the pricing model at the grant date or
other measurement date above the amount an employee must pay to acquire the
stock. The resulting amount is charged to expense on the straight-line
basis over the period in which the Company expects to receive benefit,
which is generally the vesting period. Stock options issued to non-employee
directors at fair market value are accounted for under the intrinsic value
method.
Income Taxes - The Company accounts for income taxes in accordance with
------------
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, income
taxes are recognized for the amount of taxes payable or refundable for the
current year and deferred tax liabilities and assets for future tax
consequences of transactions that have been recognized in the Company's
financial statements or tax returns. A valuation allowance is provided when
it is more likely than not that some portion or the entire deferred tax
asset will not be realized.
Net Loss Per Common Share - The Company adopted Statement of Financial
-----------------------------
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of the
entity. For the years ended December 31, 2002 and 2001, basic and diluted
earnings per share amounts are the same. Since the Company incurred losses
for the years ended December 31, 2002 and 2001, the calculation of diluted
per share amounts would result in an anti-dilutive calculation that is not
permitted and therefore not included. The effect of options and warrants
are not considered because items effect would be anti-dilutive.
Concentrations of Major Customers - During the year ended December 31,
---------------------------------
2002, two customers accounted for $383,717 (25%) of total sales. At
December 31, 2002, one such customer accounted for $149,423 (49%) of net
accounts receivable. During the year ended December 31, 2001, six customers
accounted for $960,320 (45%) of total sales. At December 31, 2001, one such
customer accounted for $102,000 (30%) of net accounts receivable.
Dependence on Major Suppliers - The Company is dependent on a few major
--------------------------------
suppliers for the production of golf club heads and tooling and shafts used
to produce the completed golf clubs. However, management believes that any
risk is mitigated, due to the large number of alternative suppliers.
Reclassifications - Certain prior period balances have been reclassified to
-----------------
conform to current years presentation.
F-10
Advertising - Cost associated with advertising and promotion is expensed as
-----------
incurred. Costs related to the direct response program have been
capitalized as prepaid marketing costs. Advertising expense for 2002 and
2001 were $182,307 and $45,084 respectively.
Prepaid Marketing Costs - Prepaid marketing costs are capitalized as
-------------------------
incurred then amortized to expense on a cost-pool-by-cost-pool basis over
the period during which the future benefits are expected to be received.
New Accounting Pronouncements - In June 2001, the Financial Accounting
-----------------------------
Standards Board (FASB) issued SFAS No. 141, "Business Combinations", and
SFAS no. 142 "Goodwill and Other Intangible Assets". SFAS No. 141
prospectively prohibits the pooling-of interest method and requires the
purchase method of accounting for business combinations initialed after
June 30, 2001. SFAS No. 142 establishes a new method of testing intangible
assets for impairment on an annual basis or an interim basis if an event
occurs or circumstances change that would reduce the fair value below its
carrying value. The Company effectively adopted these standards as of
January 01, 2002. No impairments were recorded in 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of "Long-Lived Assets", which supersedes previous
guidance on Financial accounting and reporting for the impairment or
disposal of long-lived assets and for segments of a business to be disposed
of. This Standard supersedes SFAS no. 121 and portions of APB Opinion No.
144 did not have a significant impact on the Company's financial position
or results of operations.
In July 2002, the FASB issued SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3: "Liability Recognition for certain Employee
Termination Benefits and Other Cost to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability
be recognized for those costs only when the liability is incurred, that is,
when it meets the definition of a liability in the FASB's conceptual
framework, SFAS No. 146 also establishes fair value as the object for
initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with earlier adoption encouraged.
Management does not expect the adoption of SFAS No. 146 will have a
material impact on the Company's financial position or results of
operations.
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transaction and Disclosure." SFAS No. 148 amends SFAS No 123
to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. It also
amends the disclosure requirements of SFAS No. 123. If an entity elects to
adopt the recognition provisions of the fair value based method of
accounting for stock-based compensation in a fiscal year beginning before
December 16, 2003, that change in accounting principle shall be reported
using wither the (i) prospective method, (ii) the modified prospective
method, or (iii) the retroactive restatement method as defined in SFAS No.
148, SFAS No. 148 is effective for fiscal years ending after December 15,
2002. Since the Company has elected to continue accounting for stock-based
compensation under APB No. 25, the adoption of SFAS no. 148 has had no
impact to the Company's Financial position or results of operations. The
Company's financial statement disclosures have been designed to conform to
the new disclosure requirements prescribed by SFAS No. 148.
3. ACQUISITIONS
Lazereyes Product - The Company acquired all of the operating assets of
------------------
Lazereyes Golf, LLC and Stone Pine Lazereyes, LLC including the "Lazereyes"
trade name. Lazereyes designs, assembles and sells golf training clubs.
Lazereyes is operated as a separate division of GolfGear.
In consideration for acquiring these assets, the Company assumed no
liabilities and issued 100,000 shares of its restricted Common Stock. The
Company also agreed to issue as additional consideration $1.50 for every
Lazereyes training club sold for a period of two years from August 1, 2002
to July 31, 2004. This transaction was completed on July 1, 2002.
Currently, no Lazereyes training clubs are being produced. The fair value
of consideration given was $28,000 and was assigned to intangibles.
F-11
Bel Air Golf Product Lines - The Company acquired all of the operating
----------------------------
assets of Bel Air Golf Companies, including the "Bel Air Golf" and "Players
Golf" trade names. Players Golf offers a full line of junior golf clubs,
and Bel Air Golf is known primarily for golf glove products that offer both
value and quality. Bel Air Golf and Players Golf are operated as a separate
division of GolfGear.
In consideration for acquiring these assets, the Company assumed
liabilities of approximately $50,000 and issued 400,000 shares of its
restricted Common Stock. The Company also agreed to issue 255,000 warrants
exercisable at $1.00 per share for a period of six months from closing,
100,000 warrants exercisable at $1.00 per share for a period of one year
from closing, and 100,000 warrants exercisable at $1.00 per share, 100,000
warrants exercisable at $2.00 per share and 100,000 warrants exercisable at
$3.00 per share, vesting and exercisable only if net revenues from Bel Air
Golf and Players Golf reach $1,500,000, $2,000,000 and $2,500,000 in 2000,
2001 and 2002, respectively. The Company issued 250,000 of the 400,000
shares on November 29, 1999 as an advance, in order to be able to operate
the Bel Air Golf Companies on an interim basis. The Company also issued 10%
of the securities described above as a finder's fee with respect to this
transaction. Accordingly, all warrants expired at the end of 2002. This
transaction was completed on April 11, 2000.
4. INVENTORIES
At December 31, 2002 and 2001, inventories consists of the following:
2002 2001
-------- --------
Component parts $189,616 $482,024
Finished goods 303,288 209,241
-------- --------
$492,904 $691,265
======== ========
5. PROPERTY AND EQUIPMENT
At December 31, 2002 and 2001 property and equipment consists of the
following:
2002 2001
---------- ----------
Machinery and equipment $ 23,143 $ 24,000
Office equipment 16,024 16,025
Computers and software 28,810 28,949
Furniture and fixtures 12,460 48,902
Automobile 52,091 52,090
Trade show booth 58,538 62,055
Tooling 26,090 44,737
---------- ----------
217,156 276,758
Less accumulated depreciation (118,416) (148,004)
---------- ----------
$ 98,740 $ 128,754
========== ==========
6. INTANGIBLE ASSETS
At December 31, 2001 and 2000, intangible assets consists of the following:
2002 2001
---------- ----------
Patents $ 220,210 $ 206,210
Trademarks 71,408 57,408
---------- ----------
291,618 263,618
Less accumulated amortizaion (191,103) (179,696)
---------- ----------
$ 100,515 $ 83,922
========== ==========
F-12
During the year ended December 31, 2002 the Company recorded $28,000 as
additional patents and trademarks associated with its asset purchase of
Lazereyes Golf, LLC.
7. BANK LINES OF CREDIT
The Company has a $250,000 bank line collateralized by eligible accounts
receivable. The line of credit matures on December 9, 2003 and bears
interest at 28% annually. Interest is payable monthly. Outstanding
borrowings at December 31, 2002 were $26,253. The Company also has an
unsecured $70,000 line of credit with another bank. Interest is payable
monthly at a variable rate (10.25% at December 31, 2002). Outstanding
borrowings at December 31, 2002 and 2001, were $44,641 and $57,100,
respectively. This is a revolving line of credit with no maturity date
personally guaranteed by the Company's Founder.
8. NOTES PAYABLE AND NOTES PAYABLE STOCKHOLDER
At December 31, 2002 and 2001, notes payable consisted of the following:
2002 2001
--------- ---------
Notes payable to individuals, payable on
demand plus interest at rates ranging
from prime to 18% $ 83,177 $119,091
--------- ---------
83,177 119,091
Less current portion (83,177) (69,091)
--------- ---------
$ - $ 50,000
========= =========
On November 20, 2002 the Company entered into a loan agreement with Peter
Pocklington, its Chairman and Chief Executive Officer whereby Mr.
Pocklington loaned the Company $200,000. As consideration for the loan the
Company agreed to an amendment to a stock pledge agreement and released
9,029,518 shares of Common Stock held by the Company as security for
payment of a promissory note (See Note 14) due for Pocklington's purchase
of 15,000,000 shares of Common Stock. The promissory note remains
collateralized by 3,303,482 shares of Common Stock to secure the unpaid
balance of the promissory notes less the loan to the Company. The loan
bears interest at 9 1/2% and is due on April 20, 2003. The Company's board
of directors unanimously approved the transaction by written consent on
November 20, 2002.
9. CONVERTIBLE DEBENTURES
On June 6, 2002, GolfGear International, Inc. (the "Company") completed the
sale of $2,100,000 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's patents, trademarks, and other intangible assets
secured the debentures. 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
$0.10 per share. The costs associated with the issuance of the Debentures
have been capitalized and are being amortized over the 18 months. If the
Debentures convert to equity prior to the 18-month term the unamortized
portion will be debited to additional paid in capital.
As a requirement of the transaction Peter H. Pocklington was made Chairman
of the Board. The agreement also gives Mr. Pocklington the right to merge
the Company with his medical products company in a reverse merger at a
F-13
price of Twenty-Five Cents ($.25) per share of Common Stock. The value of
the medical products company shall be determined by obtaining a fairness
opinion from a reputable investment-banking firm.
The conversion price of the debentures ($.25 per share) and the exercise
price of the warrants ($.10 per share) were deemed to be less than the fair
market value of the underlying Common Stock ($.50 per share) on the
transaction date (June 6, 2002) resulting in a beneficial conversion
feature as defined in EITF 98-5. The total fair value of the warrants,
valued using the Black-Scholes option pricing model, was allocated to the
proceeds at $997,103. The amount allocated to the debentures was
$1,102,897. Since the debenture is convertible six months from the date of
issuance, EITF 98-5 requires the debenture to be recorded at a discount on
the issuance date, and then amortized to interest expense to the earliest
date the debenture is convertible using the effective interest method. The
Company recorded the discount to interest expense for the year ended
December 31, 2002 using the straight-line method, which approximates the
effective interest method due to the short maturity of the debentures.
10. COMMITMENTS
Operating Leases - The Company leases its facilities and various equipment
----------------
under non-cancelable operating leases. Future minimum lease payments
required under non-cancelable operating leases with initial terms in excess
of one year were as follows at December 31, 2002 and 2001:
Year Ended December 31,
-----------------------
2003 $122,499
2004 118,308
2005 56,567
2006 888
--------
298,262
========
Rent expense under operating leases included in the financial statements
for the years ended December 31, 2002 and 2001 was $84,050 and $71,800,
respectively.
Employment Agreements - The Company entered into a five (5) year employment
----------------------
agreement with Donald A. Anderson, its founder, dated July 29, 2002. The
agreement may be terminated for cause, as defined in the agreement, without
any severance benefits. In the event of death or termination without cause
Mr. Anderson shall be entitled to receive a severance benefit of (i) two
(2) times his annual salary in effect on the date of termination, but no
greater than $300,000 for a one (1) year period and (ii) payment of
employee's COBRA premium for a one (1) year period. The agreement provides
for a base salary of $100,000 per year and an automobile allowance of $750
per month. In the event that the Company sustains a net profit for two (2)
consecutive quarters calculated in accordance with generally accepted
accounting principles in the United States, the base salary shall be
increased to $200,000, effective the first day after the second successive
fiscal quarter. In addition, Mr. Anderson was granted an option to purchase
five million (5,000,000) shares of the Company's Common Stock at fair
market value at date of grant or $.20 per share. These shares were granted
outside the Plan (hereinafter defined).
The Company entered into an at-will employment agreement with Michael A.
Piraino, its president and chief operating officer and chief financial
officer, dated September 11, 2002. The agreement provides for a base salary
of $200,000 per year and a health benefit allowance of $450 per month. The
agreement may be terminated for cause, as defined in the agreement, without
any severance benefits. In the event of termination without cause Mr.
Piraino shall be entitled to receive a severance benefit of (i) four (4)
months salary in effect on the date of termination, (ii) health benefits
for the same period and, (iii) acceleration of vesting on 750,000 shares of
Common Stock options if termination occurs during the first year of
employment. In addition, Mr. Piraino was granted an option to purchase
three million (3,000,000) shares of the Company's Common Stock at fair
market value at date of grant or $.31 per share. These shares were granted
outside the Plan (hereinafter defined).
F-14
11. LITIGATION
On November 17, 2001, MC Corporation, a Japanese corporation, filed an
action against GolfGear International, Inc. (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 that, 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 provided that the Company
issue a total of 3,000,000 shares of Common Stock to MC Corporation and
have been reflected as issued and outstanding in the Company's financial
statements at December 31, 2002. The 3,000,000 shares of Common Stock
consisted 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. 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 provided that MC Corporation's representative on the Company's Board
of Directors resign, and the Company's distribution agreement with MC
Corporation be 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).
From time to time the Company is involved in various types of litigation,
in the normal course of business, none of which is considered material at
this time.
12. RELATED PARTY TRANSACTIONS
The Company has notes payable to shareholders totaling $200,000 (See Note
8) and $97,166 as of December 31, 2002 and 2001, respectively. The notes
bear interest at rates ranging from 9 1/2% to 10% and are payable on
demand.
On June 6, 2002, the Company completed the sale of $2,100,000 of
convertible debentures. An officer and a director of the Company
participated in the convertible debenture in the amount of $160,000 in the
aggregate. See Note 9.
A member of the board of directors acts as a sales agent for one of the
Company's key suppliers and earns a fee on purchases.
F-15
13. INCOME TAXES
For the years ended December 31, 2002 and 2001, the provision for income
tax expense consists of the following and is included in operating
expenses:
Current: 2002 2001
------------ ----------
Federal $ - $ -
State 2,400 4,000
------------ ----------
2,400 4,000
------------ ----------
Deferred:
Federal 1,674,200 159,200
State 563,300 44,400
Less change in valuation allowance (2,237,500) (203,600)
------------ ----------
$ 2,400 $ 4,000
============ ==========
The tax effects of the major items recorded as deferred tax assets and
liabilities at December 31, 2002 are as follows:
Net operating loss carryforward $ 3,313,900
Allowance for doubtful accounts 39,500
Allowance for warranties 46,200
Non-deductible accruals 118,400
Depreciation (19,800)
Other 3,700
------------
3,501,900
Valuation allowance (3,501,900)
------------
$ -
============
Deferred income taxes are provided for the tax effects of net operating
loss carryforwards and temporary differences in the reporting of income for
financial statement and income tax reporting purposes, and arise
principally from the use of different methods in reporting deductions for
depreciation, bad debts and state income taxes.
As of December 31, 2002, the Company has federal and state net operating
loss carryforwards of approximately $8,117,000 and $5,732,300,
respectively. The carryforwards expire through 2017 for federal and state
purposes. The deferred tax benefit has been offset by a valuation allowance
due to the realization of these carryforwards being doubtful. No deferred
tax asset has been recognized in the financial statements due to this
uncertainty.
14. STOCKHOLDERS' EQUITY
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 $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 was secured pursuant to a stock pledge agreement that
initially pledged 12,333,000 shares of the Common Stock, which was held by
the Company as security for payment of the promissory note. As additional
consideration for lending the Company $200,000 as described in Notes 8 and
F-16
12 above the Company amended a previously executed stock pledge agreement
and agreed to the release of 9,029,518 shares of Common Stock held as
collateral under the terms of the promissory note. In the event of default
of payment of the promissory note the purchase price of the initial shares
of Common Stock purchased represented by the $200,025 payment shall be
retroactively adjusted from $0.075 to $0.25 per share.
In conjunction with a subscription agreement executed by Wyngate, Wyngate
and its President, Peter H. Pocklington, had the exclusive right for a
period of 90 days to implement a second stage of financing in the form of
the sale by the Company to accredited investors only of convertible
debentures in an aggregate amount ranging from a minimum of $2,000,000 to a
maximum of $4,000,000, which will be convertible into Common Stock at $0.25
per share for a period of 12 months commencing six months after the initial
sale of the debentures. Such financing was completed and closed on June 6,
2002. See note 9. The Company's patents, trademarks, and other intangible
assets secured the debentures. For each share of Common Stock issued upon
conversion of the debentures, one Common Stock purchase warrant will be
issued, which will be exercisable for a period of 18 months at $0.10 per
share. See subsequent events in Note 15.
The subscription agreement also provided that Peter H. Pocklington will
have the right for an 18 month period to have the Company acquire Meditron
Medical, Inc., a Canadian corporation controlled by Mr. Pocklington.
Meditron Medical, Inc. is engaged in the medical manufacturing sales
business and would be acquired in a reverse merger transaction through the
issuance of the Company's Common Stock, at an agreed value of $0.25 per
share. The value of the medical products company shall be determined by
obtaining a fairness opinion from a reliable investment banking firm.
The completion of the second stage of the financing resulted in a majority
of new directors being named to the Board of Directors, with Peter H.
Pocklington being appointed Chairman and Chief Executive Officer.
The proceeds from the sale of the debentures will be used to fund the
production and distribution of an direct response program, sales and
marketing, tour promotion, inventory purchases, repayment of loans and
advances, accounts payable, accrued expenses, product development, patent
development, litigation, and general operating expenses.
Information regarding the Company's warrants is as follows:
Shares Weighted Weighted
Underlying Average Average Fair
Warrants Exercise Price Value Exerciseable
----------- --------------- ------------- ------------
Balance, December 31, 2000 1,749,004 $ 0.84 1,749,004
Granted
Canceled (467,940) $ 0.52
Exercised
----------- ------------
Balance, December 31, 2001 1,281,064 $ 0.56 1,281,064
Granted 8,932,000 $ 0.10 $ 0.48
Canceled (443,564) $ 0.89
Exercised -
----------- ------------
Balance, December 31, 2002 9,769,500 $ 0.14 9,769,500
=========== ============
F-17
The following table summarizes the information about warrants outstanding
at December 31, 2002:
Weighted
Shares Average
Exercise Underlying Remaining
Price Warrants Contractual Life Exerciseable
-------- ---------- ---------------- ------------
$ 0.10 8,932,000 1 8,932,000
$ 0.35 390,000 2 390,000
$ 0.50 250,000 2 250,000
$ 1.00 150,000 2 150,000
$ 1.06 20,000 1 20,000
$ 1.50 27,500 3 27,500
---------- -------------
9,769,500 9,769,500
========== =============
Stock Options - in October 1997, the Board of Directors of the Company
--------------
approved a stock option plan entitled "GolfGear International, Inc. 1997
Stock Option Plan" ("Plan"). This Plan is intended to allow designated
officers and employees and certain non-employees of the Company to receive
stock options to purchase the Company's Common Stock and to receive grants
of Common Stock subject to certain restrictions as more fully described in
the Plan. The Plan has reserved 2,642,625 shares of the Company's Common
Stock, subject to adjustments, that may be issued under the Plan.
The Plan provides for the granting to employees (including employees who
are also directors and officers) of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting of non-statutory
stock options to directors, employees and consultants. The Board of
Directors of the Company currently administers the Plan.
The exercise price per share of incentive stock options granted under the
Plan must be at least equal to the fair market value of the Common Stock on
the date of the grant. With respect to any participant who owns shares
representing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive or
non-statutory stock options must be equal to at least 110% of the fair
market value of the grant date, and the maximum term of the option must not
exceed five years. Upon a merger of the Company, the options outstanding
under the Plan will terminate unless assumed or substituted by the
successor corporation. As of December 31, 2002, 2,642,625 options have been
granted under the Plan and 11,000,000 options have been granted outside the
Plan, including 5,400,000 options granted to the Company's Founder as
follows: 250,000 during 2000 that are exercisable at $0.55 and expire in
December 2005, 150,000 during 2001 that are exercisable at $0.50 and expire
in December 2006 and 5,000,000 during 2002 that are exercisable at $.20 and
expire in July 2012; 3,000,000 options were granted to the Company's
President that are exercisable at $0.31 and expire in September 2012; and
1,000,000 options were granted to a director that are exercisable at $0.21
and expire in September 2012. All these grants are considered granted
outside the Company's Stock Option Plan because they exceed the number of
shares reserved for such plan. A director of the Company was granted
1,000,000 in options as a finder's fee.
F-18
Information regarding the Company's stock options is as follows:
Shares Weighted Weighted
Underlying Average Average Fair
Options Exercise Price Value Exerciseable
----------- --------------- -------------- ------------
Balance, December 31, 2000 2,622,789 2,622,789
Granted 591,666 $ 0.45 $ 0.10 591,666
Canceled (502,854) $ 3.62 (502,854)
Exercised
----------- ------------
Balance, December 31, 2001 2,711,601 2,711,601
Granted 10,208,332 $ 0.22 $ 0.22 4,765,801
Canceled (824,936) $ 0.62 (1,894,905)
Exercised (50,000) $ 0.01 (50,000)
----------- ------------
Balance, December 31, 2002 12,044,997 5,532,497
=========== ============
The following table summarizes the information about stock options
outstanding at December 31, 2002:
Weighted
Shares Average
Underlying Remaining
Exercise Price Options Contractual Life Exerciseable
--------------- ---------- ---------------- ------------
$ 0.01 50,000 0.5 50,000
$ 0.10 1,000,000 10.0 1,000,000
$ 0.20 6,025,000 10.0 2,416,667
$ 0.25 49,997 3.5 49,997
$ 0.31 3,100,000 10.0 195,833
$ 0.50 1,315,000 3.5 1,315,000
$ 0.55 325,000 3.0 325,000
$ 1.50 50,000 3.0 50,000
$ 2.50 15,000 3.0 15,000
$ 3.50 50,000 3.0 50,000
$ 4.50 25,000 3.0 25,000
$ 5.50 15,000 3.0 15,000
$ 6.50 25,000 3.0 25,000
---------- ------------
12,044,997 5,532,497
========== ============
The Company accounted for stock options granted to employees, officers and
directors under APB Opinion No. 25. "Accounting for Stock Issued to
Employees," under which no compensation cost has been recognized. Options
granted to non-employee directors are accounted for in accordance with SFAS
No. 123. Had the compensation cost for the options been determined based
upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss and basic and diluted
loss per share in 2002 would have been increased by approximately $184,449
resulting in no change to the per share amount.
The company has service agreements with two non-employees. Under these
agreements there have been 1,100,000 options granted with a value of
$119,137. The options are accounted for as deferred compensation and are
being amortized over the life of the contracts.
The fair value of the warrants and option granted is estimated on the date
of grant using the Black-Scholes option pricing model with following
weighted average assumptions: dividend yield of 0%, volatility of 83%,
risk-free interest rate of 3.6% and an expected life of five years.
F-19
The effect of applying SFAS No. 123 in this pro forma disclosure is not
indicative of future results.
15. SUBSEQUENT EVENTS
The Company entered into an at-will employment agreement with Chris
Holiday, its Senior Vice President of Sales and Marketing, dated January
20, 2003. The agreement provides for a base salary of $175,000 per year and
a health benefit allowance of $450 per month. The agreement may be
terminated for cause, as defined in the agreement, without any severance
benefits. In the event of termination without cause Mr. Holiday shall be
entitled to receive a severance benefit of (i) four (4) months salary in
effect on the date of termination, (ii) health benefits for the same period
and, (iii) acceleration of vesting on 500,000 shares of Common Stock
options if termination occurs during the first year of employment. In
addition, Mr. Holiday was granted an option to purchase two million
(2,000,000) shares of the Company's Common Stock at fair market value at
date of grant or $.20 per share. These shares were granted outside the
plan.
On December 16, 2002 the Company's board of directors approved a
modification to the warrants whereby the holder, without the prior
conversion of the debenture, could exercise the warrant. In January 2003,
as a result of the modification to the warrants, debenture holders
exercised 2,800,000 warrants at $.10 per share resulting in the issuance of
2,800,000 shares of Common Stock for $280,000 in proceeds.
F-20
SIGNATURES
In accordance with Section 13 or 15(d) 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)
Date: April __, 2003 By: /s/ Peter H. Pocklington
------------------------------
Peter H. Pocklington
Chairman of the Board
In accordance with the Exchange Act, the following persons on behalf of the
registrant and in the capacities and on the dates indicated have signed this
report.
Date: April __, 2003 By: /s/ Donald A. Anderson
------------------------------
Donald A. Anderson
Founder, Director and Chief
Executive Officer
Date: April __, 2003 By: /s/ Michael A. Piraino
------------------------------
Michael A. Piraino
President, Chief Operating Officer
and Chief Financial Officer
Date: April __, 2003 By: /s/ Roger Miller
------------------------------
Roger Miller
Director
Date: April __, 2003 By: /s/ Dean Reinmuth
------------------------------
Dean Reinmuth
Director
Date: April __, 2003 By: /s/ Robert Williams
------------------------------
Robert Williams
Director
Date: April __, 2003 By: /s/ Daniel C. Wright
------------------------------
Daniel C. Wright
Vice President of Finance
and Chief Accounting Officer
F-21
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GolfGear International, Inc. (the
"Company") on Form 10-KSB for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Michael
A. Piraino, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(b)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
aspects, the financial condition and results of operations of the Company.
Date: April 15, 2003 By: /s/ Michael A. Piraino
------------------------------
Michael A. Piraino
President, Chief Operating Officer
and Chief Financial Officer
F-22
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GolfGear International, Inc. (the
"Company") on Form 10-KSB for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Donald
A. Anderson, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(b)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
aspects, the financial condition and results of operations of the Company.
Date: April 15, 2003 By: /s/ Donald A. Anderson
------------------------------
Donald A. Anderson
Founder, Director and Chief
Executive Officer
F-23
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Michael A. Piraino, certify that:
1) I have reviewed this annual report on Form 10-KSB of GolfGear
International, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedure as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and b. Any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: April 15, 2003
F-24
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Donald A. Anderson, certify that:
1) I have reviewed this annual report on Form 10-KSB of GolfGear
International, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
c. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
d. Evaluated the effectiveness of the registrant's disclosure
controls and procedure as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
e. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
d. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and e. Any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: April 15, 2003
F-25