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, 2003
{ } 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 43-162755
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11562 Knott Ave, Suite 9 Garden Grove, CA 92841
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(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (714) 892-8889
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
-----------------------------
(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, 2003 were
$1,973,135
The aggregate market value of the issuer's common stock held by non-affiliates
of the Company as of May 9, 2004, was $638,780.
As of May 9, 2005, the issuer had 42,203,966 shares of Common Stock issued and
outstanding. Transitional Small Business Disclosure Format: Yes { } No {X}
TABLE OF CONTENTS
PART I.........................................................................1
ITEM 1: BUSINESS........................................................1
ITEM 2: PROPERTIES.....................................................12
ITEM 3: LEGAL PROCEEDINGS..............................................12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............13
PART II.......................................................................13
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.........................................13
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................14
ITEM 7: FINANCIAL STATEMENTS...........................................20
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................21
ITEM 8A: CONTROLS AND PROCEDURES........................................21
ITEM 8B: OTHER INFORMATION..............................................21
PART III......................................................................22
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............22
ITEM 10: EXECUTIVE COMPENSATION.........................................23
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................23
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................24
ITEM 13: EXHIBITS.......................................................24
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................26
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 2003. The Company offers
drivers in several sizes ranging from 360 cc to 450 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.
During the third quarter of 2004, the Company suspended normal
operations, including expanding brands and product offerings, new marketing
programs, and direct marketing to customers, due to a lack of operating working
capital resources. To the extent that the Company is unable to secure financing
in 2005, the Company's liquidity and ability to continue to conduct operations
will be impaired.
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.
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.
1
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 unbranded clubs in many cases bought in a "boxed set" that comes
with all the clubs in a set and a bag.
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 is 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 consistent, dense sweet
spot, superior weight distribution and cutting-edge technology. Titanium drivers
have become common because of the move to the larger size heads. However, there
is a cost factor involved in this transition. Two basic ways of manufacturing an
all titanium driver has been developed: four piece forgings and investment cast
body with a forged-face insert. Of the two ways to manufacture a driver, the
four piece forgings have many welded seams that produce inconsistencies in
strength and weight distribution, the cast body with a forged face produces a
much more consistent club head and hitting surface. The Company holds a patent
and produces all of its drivers utilizing the desirable cast body with a
forged-face technology.
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
There have been many established brands in the golf market. The
competitive nature of the golf business has altered the market share and
ownership of many of these brands. Spalding, MacGregor, and Hogan are
well-recognized old-line names in golf equipment. Each of these has undergone
significant changes in the past few years. Callaway has purchased Spalding and
Hogan out of bankruptcy and MacGregor has been reorganized under new ownership.
Names currently dominating the industry's premium-brand sector are Callaway,
Titleist, Cobra, TaylorMade and to a lesser extent 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 has developed
a forged faced driver for Tour players 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. Under the Leading Edge brand name, the Company
offers the Leading Edge Putter line.
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) line at the PGA show in Orlando in January of 2002. The
Company supplemented this with the introduction of Tsunami(R) 360cc and 400cc
titanium drivers 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 standpoint and are very competitively priced.
The Company received notice from the USGA that its 400cc and 360cc drivers have
passed the test for spring-like effect and are approved for play. The 340cc,
360cc and 400cc 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 340cc 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.
2
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.
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 and
successfully tested a 30-minute direct response program designed to promote the
entire line of Tsunami(R) drivers. It is expected that the program will run on
The Golf Channel, ESPN, ESPN2 and Fox Sports West. 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 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 has been highly seasonal, with most companies
experiencing the majority of sales between February and June. There are also
additional sales occurring between October and December for the Christmas buying
season.
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 plans to increase its 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. 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.
Product and Name Endorsement
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, won the money title for the 2002 Pinnacle Long Drivers Tour and
recently came in second in the 2003 Re/Max World Long Drive Championship.
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 commonly
called an infomercial that is used to introduce, brand, 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. In the early stages of a direct response program campaign,
the advertising produces substantial revenue and in some cases actually produces
a profit. Over its life, the direct response program becomes a self-liquidating
advertising campaign. A direct response program campaign is also supported by
conventional selling methods.
3
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. For every 1 buyer in a direct campaign there are up to 8 buyers that
want the product but will not buy direct and will look for it in retail. 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 and tested 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 anticipated the
program will run on The Golf Channel, ESPN, ESPN2 and Fox Sports West. 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.
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 14, 2005, the Company employed 1 full-time employee and no
part-time employees. None of the Company's employees are covered by a collective
bargaining agreement.
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.
The Company is negotiating with potential distributors in Japan, and
South Africa. Currently the Company has a distribution agreement with Cloud
Water of South Korea.
Technology
Most of the Company's clubs feature its multi-patented, forged-face
insert technology. The Company currently has ten (10) patents on its forged-face
insert technology and three (3) patents on its putter 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".
4
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.
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 360cc, 400cc and
450cc 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. The Company received notice in January 2003 from the USGA that its 400cc
and 360cc 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
400cc and 360cc 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
On October 7, 2003, the Company completed the sale of $250,000 of 5%
convertible debentures to MC Corporation, a company affiliated with a Company
director and stockholder ("MC Corp"). These debentures were convertible into
common stock at $0.09 per share for a period of three months from the date of
issuance. For each share of common stock issued upon conversion of the
debentures, one common stock purchase warrant will be issued and will be
exercisable for a period of twelve months at $0.045 per share. In December 2003,
these debentures, including accrued interest of $2,083, were converted into
2,800,922 shares of common stock. The warrants expired unexercised.
On December 30, 2003, the Company completed the sale of $1,000,000 of
5% convertible debentures to Quincy Investments Corp., a company affiliated with
Peter Pocklington, Chairman, and MC Corp. These debentures were automatically
convertible into 525,000 shares of Series A preferred stock of the Company
within ninety days of the date of issuance. Pursuant to the terms of the
debenture agreement, if the Company was unable to convert the debentures into
shares of Series A preferred stock within ninety days of issuance, the
debentures would become immediately due and payable in full, with interest
continuing to accrue at the face rate of interest of 5% per annum. As of
December 31, 2003, the Company had not received $100,000 in proceeds from
Quincy, and accordingly, recorded $100,000 due from stockholder in its
consolidated balance sheet. The amount was subsequently received in January
2004. As of May 10, 2005, the debentures are in default and are due on demand.
5
From January 2004 through May 10, 2005, a director and stockholder has
advanced $237,300 to the Company to be used for working capital. The Company has
received these funds and recorded them as loans from stockholder of $185,600
during 2004 and $51,700 during 2005.
Holders of the Series A preferred stock have the right to convert the
Series A preferred stock into shares of common stock of the Company at
conversion rates of 158:1 for Quincy and 161:1 for MC Corp. upon any of the
following: (i) eighteen months after the date of issuance of the Series A
preferred stock, (ii) a change of control, as defined, or (iii) upon the date
the Company is no longer required to file report or financial statements with
the United States Securities Exchange Commission.
Recent Changes in Management and the Board of Directors
In December 2003 the Company added Mr. Naoya Kinoshita as a director.
Mr. Kinoshita is President of MC Corp, which he founded in 1990 and is involved
in real estate development and management. In 1995, Mr. Kinoshita began
development, construction and sales of generational housing; i.e., housing for
two generations of family (parents and offspring under one roof), as well as
imported housing sales from outside Japan. During the same year he started an
Internet service provider business. In 1996, Mr. Kinoshita combined his
experience in real estate development and the Internet to construct and sell the
first Internet line pre-installed condominium in Japan. More recently, he
commenced the design, construction, and sales of 2x4 housing which utilized
fewer chemicals, and more natural materials to promote healthy living for the
resident. Mr. Kinoshita has extensive expertise in real estate development,
information processing, sales, management, and distribution.
On December 18, 2003, the Company received a resignation letter from
Donald A. Anderson as a member of the Board of Directors of the Company. On
December 19, 2003, Mr. Anderson also resigned as Chief Executive Officer of the
Company and its subsidiaries. The Company accepted his resignation upon his
notice.
On July 9, 2004, Daniel C. Wright was made President and Chief
Operating Officer of the Company. Daniel Wright has been with the Company since
May of 2001 serving as its Chief Financial Officer and a director. Mr. Wright
has over eleven (11) years in senior management positions within the golf
industry. He began his career in the golf industry with Tru-Form Golf as their
controller. Tru-Form Golf manufactured clubs and accessories originally severing
as 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.
In addition to Mr. Wright's golf industry experience he has worked in the
medical and direct market industries, and he has several years experience with
local accounting firms. Mr. Wright has his bachelors in accounting and finance.
On October 12, 2004, the Company received a resignation letter from
John Pierandozzi as a member of the Board of Directors of the Company. The
Company accepted his resignation upon his notice.
In October 2004, the Company added Mr. Donald Berry as a director. Mr.
Berry is regarded as one of Canada's premier health care sales and marketing
executives. In 1997 as the Vice President of Western Canada for Ingram and Bell
Medical, where he drove the company from number three in market share to number
one in market position. While at Ingram and Bell the Western Division
contributed more then 50% of the company's annual gross profit despite the fact
that Western Canada is less then 30% of the Canadian population. In 2002 Mr.
Berry formed a partnership with Medical Mart Supplies West. As Executive Vice
President and General Manager the Company has grown from negligible sales to
over $7 million in a three year period.
In October 2004, the Company added Mr. Michael J. Gobuty as a director.
Mr. Gobuty started with Victoria Leather Garment MFG. Co. Ltd. in 1958. From an
entry level position in the receiving department, he worked progressively
through every job description in the organization to a position of complete
control of the company. One of the largest companies of its kind in Canada,
Victoria Leather manufactured and sold full lines of leather outerwear and
sportswear. Currently Mr. Gobuty is in dual control of Gobuty's & Son's, where
he is responsible for the production and sourcing of manufacturing in main land
China.
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-KSB and Form 10-QSB 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 the Company's risks and uncertainties are the following:
6
Outstanding options and warrants could affect the market price of our common
stock.
As of December 31, 2003 if all of the outstanding stock options and
warrants were exercised, the 50 million authorized number of shares would be
exceeded. Fully diluted shares would total approximately 220 million. The
exercise of such outstanding options, warrants, and debt conversions will dilute
the percentage ownership of the Company's stockholders, and any sales in the
public market of shares of Common Stock underlying such securities may adversely
affect prevailing market prices for the Common Stock. Moreover, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of such outstanding securities can be
expected to exercise their respective rights therein at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided in such securities.
Our common shareholders may experience substantial dilution
The sale of a substantial number of shares of our common stock in the
public market, or the prospect of such sales, could materially and adversely
affect the market price of our common stock. We are currently authorized to
issue up to 50 million shares of common stock. To the extent of such
authorization, our Board of Directors will have the ability, without seeking
stockholder approval, to issue additional shares of common stock in the future
for such consideration as our Board of Directors may consider sufficient. The
issuance of additional common stock in the future will reduce the proportionate
ownership and voting power of our common stock held by existing stockholders.
Sales in the public market of substantial amounts of our common stock, including
sales of common stock issuable upon exercise of options and warrants, could
depress prevailing market prices for the common stock. The existence of
outstanding options and warrants may prove to hinder our future equity
financings. Consistent with EITF 00-19, the controlling shareholders of the
Company have agreed to increase the authorized shares to 300 million.
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.
History of Losses; Accumulated Deficit; Working Capital Deficiency
The Company has incurred a history of continuing losses. 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.
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 additional operating capital during 2005 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.
Seasonal Business
Quarterly fluctuations occur as 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
7
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
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.
8
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.
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 affect 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 thirty-nine
percent (39%) of its business from one (1) major customer. There is also the
risk that the termination of the relationship with this customer could have an
adverse affect on the Company's business.
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.
9
The Company received its eighth (8th) domestic patent (Patent No.
5,720,673) on insert technology on February 4, 1998. This patent further
broadens the scope of the Company's insert patent portfolio. This 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.
Uncertainty Regarding Patents and Proprietary Rights
The Company seeks patent protection for its proprietary products and
technologies where appropriate. The Company currently has eight (8) United
States patents and two (2) international patents relating to its forged face
technology and three (3) patents relating to the Company's putter technology.
The Company also has several foreign patents pending. Corresponding foreign
patent applications with respect to the Company's pending United States
applications have been filed in the appropriate foreign jurisdictions. However,
there can be no assurance that the Company's pending patents will be awarded or
will provide the Company with significant protection against competitors.
Litigation has been necessary and may be necessary in the future to protect the
Company's patents, and there can be no assurance that the Company will have the
financial or managerial resources necessary to pursue such litigation or
otherwise to protect its patent rights. The Company has recently put various
manufacturers on notice that the Company believes the manufacturers are
infringing on Company patents. There is no guarantee that the Company will have
adequate resources to pursue litigation against these manufacturers or that the
Company would succeed in any ensuing litigation. In addition to pursuing patent
protection in appropriate cases, the Company also relies on trade secret
protection for its un-patented proprietary technology. However, trade secrets
are difficult to protect. There can be no assurance that other companies will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets, that such
trade secrets will not be disclosed or that the Company can effectively protect
its rights to un-patented trade secrets. The Company pursues a policy of having
its employees and consultants execute non-disclosure agreements upon
commencement of employment or consulting relationships with the Company, which
agreements provide that all confidential information developed or made known to
the individual during the course of employment shall be kept confidential except
in specified circumstances. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets or
other proprietary information.
Dependence on Relationships with Retailers
The Company principally relies upon its relationships with its
retailers to market the Company's products. The Company's account base consists
of select golf shops (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
10
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 and Daniel Wright, the loss of whose services could
significantly impede the achievement of the Company's planned development
objectives. The Company currently does not maintain key man life insurance on
any of these individuals. In addition, none of the officers or directors, or any
of the other key personnel, except for Mr. Wright has any employment agreement
with the Company. The success of the Company's business objectives will require
substantial additional expertise in such areas as finance, manufacturing and
marketing, among others. Competition for qualified personnel among golf
companies is intense, and the loss of key personnel or the inability to attract
and retain the additional, highly skilled personnel required for the expansion
of the Company's activities, could have a material adverse effect on the
Company's business and results of operations.
In addition, 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
eighty nine percent (89%) 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.
11
In addition, conflicts of interest may arise in the area of corporate
opportunities that cannot be resolved through arm's length negotiations. All of
the potential conflicts of interest will be resolved only through exercise by
the directors of such judgment as is consistent with their fiduciary duties to
the Company. It is the intention of management, so as to minimize any potential
conflicts of interest, to present first to the Board of Directors to the
Company, any proposed investments for its evaluation.
No Assurance of Continued Public Trading Market; Risk of Low Priced Securities
Since December 9, 1997, there has been only a limited public market for
the Common Stock of the Company. The Common Stock of the Company is currently
quoted on the Over the Counter Bulletin Board. As a result, an investor may find
it difficult to dispose of, or to obtain accurate quotations as to the market
value of the Company's securities. In addition, the Common Stock is subject to
the low-priced security or so called "penny stock" rules that impose additional
sales practice requirements on broker-dealers who sell such securities. The
Securities Enforcement and Penny Stock Reform Act of 1990 ("Reform Act")
requires additional disclosure in connection with any trades involving a stock
defined as a penny stock (generally, according to recent regulations adopted by
the U.S. Securities and Exchange Commission, any equity security that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
The regulations governing low-priced or penny stocks sometimes limit the ability
of broker-dealers to sell the Company's Common Stock and thus, ultimately, the
ability of the investors to sell their securities in the secondary market.
Effects of Failure to Maintain Market Makers
If the Company is unable to maintain 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 a 2,100 square foot facility located in Garden
Grove, CA under the terms of a one-year lease, expiring August 31, 2005. The
lease contains no renewal options and calls for monthly payments of
approximately $1,740. The Company believes that its facilities are adequate to
maintain its existing business activities.
ITEM 3: LEGAL PROCEEDINGS
Recent Litigation and Settlement
On November 17, 2001, MC Corporation, a Japanese corporation, filed an
action against the Company in the United States District Court, Central District
of California. MC Corporation had purchased 210,526 shares of Series A Senior
Convertible Preferred Stock in October 1999 for $2,000,000 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 "Agreement") with MC Corporation, John Kura and
Keizaikai USA, Inc. (hereinafter collectively referred to as the "MC Corporation
Parties"). The Agreement provided that the Company issue a total of 3,000,000
shares of common stock to MC Corporation, 2,450,300 of which were already
12
reflected as issued and outstanding at December 31, 2001. The remaining 549,700
shares of common stock were issued during 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 Agreement. All stock options and
warrants owned by the MC Corporation Parties were cancelled and MC Corporation's
anti-dilution rights arising under the Agreement were terminated. The 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).
On December 18, 2003, the Company received a resignation letter from
Donald A. Anderson as a member of the Board of Directors of the Company. On
December 19, 2003, Mr. Anderson also resigned as Chief Executive Officer of the
Company. Prior to his resignation, on or about November 8, 2003, Mr. Anderson
was suspended pending an investigation into possible violations of his
employment contract with the Company and breach of fiduciary duty. On November
18, 2003, Mr. Anderson filed a complaint against the Company and its officers
for breach of written contract, wrongful termination of employment and slander.
Subsequently, the Company filed a cross complaint against Mr. Anderson for,
among other things, breach of fiduciary duty and breach of written contract.
On June 23, 2004, the Company, its officers and Mr. Anderson entered
into a Settlement Agreement (the "Settlement Agreement"), wherein, among other
things, the Company withdrew its allegation that Mr. Anderson breached his
fiduciary duties. Pursuant to the terms of the Settlement Agreement, the Company
agreed to (i) pay Mr. Anderson $165,000 in varying installments through January
30, 2006, (ii) transfer title of a 1996 Ford custom tour van owned by the
Company to Mr. Anderson, and remove Mr. Anderson as a guarantor from certain
Company debt obligations. In return, Mr. Anderson returned to the Company
994,110 shares of the Company's common stock owned by him valued at
approximately $30,000 (fair market value of the Company's stock on the
settlement date). As of December 31, 2003, the Company recorded a net liability
of approximately $142,000 related to the settlement of this lawsuit. Mr.
Anderson also agreed to convert $60,000 in debentures, including accrued
interest, held by him into shares of the Company's common stock at a conversion
rate of $0.095 per share. These debentures were converted into 753,000 shares of
the Company's common stock on February 23, 2005.
The Company is currently in default for payment of amounts due to Mr.
Anderson under the Settlement Agreement. On February 15, 2005, Mr. Anderson
received a judgment for $76,310 due to him under the terms of the Settlement
Agreement. Pursuant to the Settlement Agreement, the Company agreed to issue a
new stock certificate to Mr. Anderson for a stolen stock certificate for
2,642,625 shares of the Company's common stock. As of May 10, 2005, the Company
has not issued this stock certificate. Mr. Anderson will dismiss the lawsuit
upon the Company's full performance of the Settlement Agreement.
In March 2004, holders in the amount of $200,000 of the Company's
convertible debentures filed suit against the Company claiming, among other
things, breach of written contract and default under security agreement and
possession of collateral. The plaintiffs are seeking repayment of the principal
amount of the debentures, including accrued interest, which matured on January
6, 2004, and possession of the intellectual property, including patents and
trademarks, which collateralized the debentures. The parties are currently
attempting to reach agreement on resolving this action in its entirety.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There has been no submission of matters to a vote of security holders
during the fiscal year ended December 31, 2003.
13
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK 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 for the
years ended 2004, 2003 and 2002 quarterly high and low sales prices of the
Company's common stock as reported on NASDAQ for the periods indicated.
High Low
---------------- ----------------
Year Ending December 31, 2004
First Quarter $ 0.07 $ 0.04
Second Quarter $ 0.05 $ 0.02
Third Quarter $ 0.05 $ 0.05
Fourth Quarter $ 0.04 $ 0.03
Year Ended December 31, 2003
First Quarter $ 0.19 $ 0.26
Second Quarter $ 0.22 $ 0.16
Third Quarter $ 0.19 $ 0.07
Fourth Quarter $ 0.10 $ 0.06
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 $ 0.19 $ 0.26
As of May 9, 2005, there were approximately 204 holders of record of
the Company's Common Stock.
Dividends
The Company has never paid any cash dividends on its common stock and
has no present intention of doing so.
Stock Option Plan
In October 1997, the Board of Directors of the Company approved the
GolfGear International, Inc. 1997 Stock Option Plan (the "1997 Plan"). The 1997
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 1997 Plan. The 1997 Plan has
reserved 2,642,625 shares of the Company's common stock, subject to adjustments,
to be issued under the 1997 Plan.
The 1997 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 1997 Plan.
The exercise price per share of incentive stock options granted under
the 1997 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 1997 Plan will
terminate unless assumed or substituted by the successor corporation. As of
December 31, 2003, 1,348,330 options have been granted and 1,294,295 options are
available for grant under the 1997 Plan.
14
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, 2003
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, 2003 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 and the Far East.
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.
During the third quarter of 2004, the Company suspended normal
operations, including expanding brands and product offerings, new marketing
programs, and direct marketing to customers, due to a lack of operating working
capital resources. The Company 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.
Restatement of Previously Issued Financial Statements
During the year ended December 31, 2003, the Company determined that
the manner in which it accounted for the beneficial conversion option on the
sale of its $2,100,000 of convertible debentures in 2002 was not in accordance
with Emerging Issues Task Force Issue No. 00-27, "Application of Issue No. 98-5
to Certain Convertible Instruments," which states that the debt discount
resulting from recording a beneficial conversion option should be accreted from
the date of issuance to the stated redemption date of the convertible
instrument, regardless of when the earliest conversion date occurs. Accordingly,
in connection with the restatement adjustments, the Company has appropriately
reflected the amortization of the debt discount resulting from the recording of
the beneficial conversion option over the term of the convertible debentures.
The Company had previously recorded the amortization of the debt discount over
the earliest period that the convertible debentures could be converted.
During the year ended December 31, 2003, the Company also determined
that certain transactions involving the issuance of its common stock were not
recorded appropriately in 2002. During 2002, the Company acquired the operating
assets of Lazereyes and issued 150,000 shares of its common stock valued at
$42,000 as purchase consideration. In connection with the restatement
adjustments, the Company has reflected the value of the purchase consideration
at $42,000 and amortized the additional purchase consideration that was
allocated to acquired intangibles. The Company had previously recorded the
purchase consideration as 100,000 shares of its common stock valued at $28,000.
In addition, during 2002 the Company issued 960,000 shares of its common stock
valued at $240,000 and warrants valued at $172,200 as deferred financing costs
in connection with the $2,100,000 convertible debenture financing. The Company
had previously recorded 1,072,000 shares of its common stock valued at $268,000
and warrants valued at $218,120 as deferred financing costs. Accordingly, in
connection with the restatement adjustments, the Company has reflected the
appropriate number of shares issued and the associated value, and amortized the
adjusted amount over the term of the convertible debentures.
15
See Note 16 to the accompanying Consolidated Financial Statements for
the year ended December 31, 2002 included in this Annual Report on Form 10-KSB
for a summary of the effects of the restatement adjustments on the Company's
consolidated balance sheet as of December 31, 2002, and on the Company's
consolidated statements of operations and cash flows for the year ended December
31, 2002. The information provided in the accompanying Management's Discussion
and Analysis of Financial Condition and Results of Operations reflects the
effect of the restatement adjustments.
Results of Operations
Years Ended December 31, 2003 and 2002
Net sales increased to $1,973,135 in 2003 from $1,546,234 in 2002, an
increase of $426,901 or 27.6%. The increase in net sales in 2003 as compared to
2002 is a result of the Company's new marketing efforts and the public
acceptance/demand for the Company's new product line.
Gross profit increased to $561,904 in 2003 from $260,024 in 2002, and
increased as a percentage of net sales to 28.5% in 2003 from 16.8% in 2002. In
2002, the Company redesigned its product line and incorporated new technology.
As a result, The Company chose 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
its pricing to remain competitive and maintain its market share. Historically,
the Company has had gross margins in the forty percent range.
Selling and marketing expenses increased to $1,061,355 in 2003 (53.8%
of net sales) from $553,971 in 2002 (35.8% of net sales), an increase of
$507,384. In 2003, the Company expensed the cost of its infomercial of $602,364.
Additionally, during 2003 the Company incurred increased expenses for
consultants, travel, advertising, and marketing.
Tour and pro contract expenses decreased to $75,760 in 2003 (3.8% of
net sales) from $93,101 in 2002 (6% of net sales), a decrease of $17,341 or
18.6%. Tour and pro contract expenses decreased in 2003 as compared to 2002 as a
result of contracts expiring and the Company opting not to renew them.
General and administrative expenses increased to $1,795,546 in 2003
(91% of net sales) from $1,504,241 in 2002 (97.3% of net sales), a 19.4%
increase or $291,305. In 2003, the Company added some new key personnel
resulting in increased salaries and related fringe benefits. In addition, the
Company had increased insurance and legal expenses. The increases in salaries
are due to new hires (President and SVP of Sales and Marketing). The increases
in insurance are due to expanded coverage and all of the legal expenses were in
the normal course of business.
Depreciation and amortization increased to $58,274 in 2003 from $52,078
in 2002, an increase of $6,196. The increase is a result of the write off of
certain intangible assets in 2003 which were acquired in connection with the
Lazereyes acquisition in 2002.
Interest expense increased to $1,667,801 in 2003 from $1,214,042 in
2002. The increase in interest expense was primarily due to the increase in
interest expense related to the $2,100,000 convertible debenture financing which
closed in June 2002. In connection with the financing, the Company incurred
deferred financing costs and recorded a debt discount related to a beneficial
conversion feature and the estimated fair value of warrants issued in as part of
the financing. The deferred financing costs were amortized over the 18-month
term of the convertible debentures and were recorded as interest expense. As a
result, the increase in interest expense is related to the Company recording
approximately 11 months of non-cash interest expense in 2003 compared to
approximately seven months in 2002.
Net loss was $4,157,599 for 2003 as compared to a net loss of
$3,087,687 for 2002. The increase in the net loss is primarily related to the
increase in non-cash interest expense noted above, as well as the expensing of
the infomercial costs of $602,364, and approximately $250,000 in legal expenses
in connection with the settlement of a lawsuit.
Liquidity and Capital Resources
The consolidated financial statements as of and for the year ended
December 31, 2003 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, 2003, the
Company incurred losses from operations of $2,429,031 and a net loss of
$4,157,599; used cash in operating activities of $998,760; had a working capital
deficit of $2,243,712 and a stockholders' deficit of $2,130,302. As a result of
these factors, among others, there is substantial doubt about the Company's
ability to continue as a going concern.
16
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.
The Company has financed its working capital requirements during the
past few years principally from the private placement of securities. Such funds
have periodically been supplemented with short-term borrowings under the
Company's bank line of credit and other private sources. The Company's bank
lines of credit paid in full and closed in 2004. 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 $998,762 during the year
ended December 31, 2003, as compared to cash of $2,322,441 used during the year
ended December 31, 2002. The decrease in cash utilized in operating activities
in 2003 as compared to 2002 was primarily a result of increased sales levels,
higher gross margins and a reduction in deferred advertising costs. At December
31, 2003, cash was $60,339 representing a decrease of $56,679, as compared to
$117,018 at December 31, 2002. The Company had a working capital deficit of
$2,243,712 at December 31, 2003, as compared to a working capital deficit of
$1,573,400 at December 31, 2002.
Investing Activities
During the years ended December 31, 2003 and 2002, net cash used in
investing activities was $41,746 and $31,981, respectively. In 2003, the Company
opened a fitting center in Rancho Mirage, California and capitalized various
leasehold improvements. The fitting center never met the Company's revenue
projections and was closed in early 2004. Due to the closure, the leasehold
improvements were deemed impaired at December 31, 2003, and are reflected in
loss on disposal of assets in the consolidated statement of operations for the
year ended December 2003.
Financing Activities
In 2002, the Company entered into an agreement with Wyngate Limited, a
Jersey Limited Company, which included the sale of 15,000,000 shares of common
stock at $0.075 per share, for an aggregate purchase price of $1,125,000, which
included $200,025 in cash and a promissory note due and payable eighteen (18)
months from the date thereof in the principal amount of $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 gave Mr. Pocklington the right to merge the Company with his medical
products company in a reverse merger at a price of $0.25 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. In 2003,
the Company forgave $150,000 of the promissory note in consideration for the
Parties cancellation of their right to merge the Company with Meditron Medical,
Inc., an option that they had acquired under the terms of their original
investment.
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 9.5% 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 months commencing six 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 common stock purchase warrant will be issued, which will be
exercisable for a period of eighteen months at $0.10 per share. During 2003, the
Company repaid $700,000 in principal related to these convertible debentures.
17
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.
On October 7, 2003, the Company completed the sale of $250,000 of
convertible debentures. The debentures are convertible into common stock at
$0.09 per share for a period of three months 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 twelve months at $0.045 per
share. This debenture, including accrued interest, was converted into 2,800,922
shares of common stock during 2003.
On December 30, 2003, the Company completed the sale of $1,000,000 of
convertible debentures. The debentures are automatically converted into
Preferred Stock at $1.00 per share within ninety days of the date of issuance.
Holders of the preferred stock shall have the right to convert the Preferred
stock into shares of Common Stock of the Company at conversion rates of 158:1,
and 161:1. The preferred stock is convertible upon any of the following:
eighteen months after the issuance of the preferred stock, a change in control
or upon the date the Company is no longer required to file reports or financial
statements with the United States Securities Exchange Commission. If the Company
is not able to convert this Debenture into shares of Preferred within ninety
days from the date of issuance, the Debentures shall become immediately due and
payable in full, with interest accruing on the face amount at a rate of 5% per
annum. Currently the debentures are in default, but the holders have made no
demands at this time.
As of December 31, 2003 the Company has borrowed $109,223 under its
secured line of credit arrangements with banks. Borrowing availability under all
the Company's lines of credit was $148,665 at December 31, 2003.
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 consolidated 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 consolidated 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 performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company regularly monitors its
customer collections and payments and maintains a provision for estimated credit
losses based upon the Company's historical experience and any specific customer
collection issues that have been identified. While such credit losses have
historically been within the expectations and the provisions established by the
Company, there can be no assurance that the Company will continue to experience
the same credit loss rates that have been experienced in the past.
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 excess 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
excess inventory is applied against the reserve allowance. Once established,
write-downs of inventories are considered permanent adjustments to the cost
basis of the obsolete or excess inventories.
18
Revenue Recognition
The Company recognizes revenue when products are shipped to a customer
and the risks and rewards of ownership and title have passed based on the terms
of sale. The Company records a provision for sales returns and claims based upon
historical experience. Actual returns and claims in any future period may differ
from the Company's estimates.
Amounts billed to customers for shipping and handling fees are included
in net sales, and freight costs incurred related to these fees are included in
cost of goods sold in accordance with Emerging Issues Task Force ("EITF") Issue
No. 00-01, "Accounting for Shipping and Handling Fees and Costs."
Licensing revenue is recognized when earned per the terms of royalty
agreements. Occasionally, licensees pay royalties in advance, which are recorded
as deferred licensing revenue in the accompanying consolidated balance sheets
until such time they are earned.
Advertising
The Company expenses advertising costs as incurred, except certain
direct-response advertising costs. Direct-response advertising costs are
capitalized as incurred and then expensed when the related advertising program
is aired.
New Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company's adoption of FIN 45 did not have a material
impact on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." 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 employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for financial statements issued for
fiscal years ending after December 15, 2002. The interim disclosure provisions
are effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The Company has applied the
disclosure provisions of SFAS No. 148 in its financial statements and the
accompanying notes.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin 51, Consolidated Financial Statements," to improve financial
reporting of special purpose and other entities. In accordance with the
interpretation, business enterprises that represent the primary beneficiary of
another entity by retaining a controlling financial interest in that entity's
assets, liabilities, and results of operations must consolidate the entity in
their financial statements. Prior to the issuance of FIN 46, consolidation
generally occurred when an enterprise controlled another entity through voting
interests. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company does not expect FIN 46 to have a material impact on its
financial statements as it has no variable interest entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also includes required disclosures for financial instruments within its
scope. For the Company, SFAS No. 150 was effective for instruments entered into
or modified after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatory redeemable financial instruments. For certain
mandatory redeemable financial instruments, SFAS No. 150 will be effective for
the Company on January 1, 2005. The Company currently does not have any
financial instruments that are within the scope of SFAS No. 150.
19
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify
that abnormal amounts of facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company is
in the process of evaluating whether the adoption of SFAS No. 151 will have a
significant impact on the Company's overall results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," to provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement No. 123(R) covers
a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance in APB Opinion
No. 25, as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair-value-based method been used.
Public entities (other than those filing as small business issuers) will be
required to apply SFAS No. 123(R) as of the first interim or annual reporting
period that begins after June 15, 2005. The Company is in the process of
evaluating whether the adoption of SFAS No. 123(R) will have a significant
impact on the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." This statement amends APB Opinion No. 29 to eliminate
the exceptions for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions for SFAS No. 153 are effective for
nonmonetary asset exchanges incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the effect, if any, of adopting
SFAS No. 153.
20
ITEM 7: FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm...........F-1
Consolidated Balance Sheets at December 31, 2003 and 2002.........F-2
Consolidated Statements of Operations
for the years ended December 31, 2003 and 2002................F-3
Consolidated Statements of Stockholders' Deficit
for the years ended December 31, 2003 and 2002................F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 2003 and 2002................F-5
Notes to Consolidated Financial Statements........................F-7
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
GolfGear International, Inc.:
We have audited the accompanying consolidated balance sheets of GolfGear
International, Inc. and subsidiaries (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 financial position of GolfGear
International, Inc. and subsidiaries as of December 31, 2003 and 2002 and the
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 2 to the
consolidated financial statements, the Company has incurred recurring losses and
requires additional financing to continue operations. These conditions, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets carrying amounts or
the amount and classification of liabilities that may result should the Company
be unable to continue as a going concern.
As discussed in Note 16 to the consolidated financial statements, the Company
restated its 2002 consolidated financial statements.
CORBIN & COMPANY, LLP
Irvine, California
May 10, 2005
F-1
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
(Restated)
ASSETS
Current assets:
Cash $ 60,339 117,018
Accounts receivable, net of allowance for doubtful accounts
of $49,713 and $99,079, respectively 131,395 302,216
Due from stockholder for convertible debenture financing 100,000 --
Inventories 169,379 492,904
Prepaid expenses 74,995 58,053
------------ ------------
Total current assets 536,108 970,191
Property and equipment, net 34,049 98,740
Other assets:
Intangible assets, net 71,591 111,015
Deferred financing costs, net -- 270,193
Deferred advertising costs -- 601,764
Deposits 7,770 7,770
------------ ------------
Total assets $ 649,518 $ 2,059,673
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 900,873 $ 968,708
Accrued product warranties 91,683 116,102
Accrued interest payable 172,339 89,449
Bank lines of credit 109,223 70,894
Notes payable 33,177 83,177
Note payable to stockholder -- 200,000
Convertible debentures due to related parties, net of
debt discount of $977,788 at December 31, 2003 22,222 --
Convertible debentures, net of debt discount of $1,159,739
at December 31, 2002 1,400,000 940,261
Deferred licensing revenue 50,303 75,000
------------ ------------
Total current liabilities 2,779,820 2,543,591
------------ ------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value; 10,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
40,445,076 shares and 34,794,154 shares, respectively
issued and outstanding 40,445 34,794
Additional paid-in capital 14,275,837 12,748,905
Deferred compensation (66,941) (100,409)
Common stock purchase note receivable -- (945,164)
Accumulated deficit (16,379,643) (12,222,044)
------------ ------------
Total stockholders' deficit (2,130,302) (483,918)
------------ ------------
Total liabilities and stockholders' deficit $ 649,518 $ 2,059,673
============ ============
See report of independent registered public accounting firm and
notes to consolidated financial statements
F-2
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 and 2002
2003 2002
------------ ------------
(Restated)
Net sales $ 1,973,135 $ 1,546,234
Cost of goods sold 1,411,231 1,286,210
------------ ------------
Gross profit 561,904 260,024
Operating expenses:
Selling and marketing 1,061,355 553,971
Tour and pro contracts 75,760 93,101
General and administrative 1,795,546 1,504,241
Depreciation and amortization 58,274 52,078
------------ ------------
Total operating expenses 2,990,935 2,203,391
------------ ------------
Loss from operations (2,429,031) (1,943,367)
Other income (expense):
Interest income 17,603 29,237
Interest expense (1,667,801) (1,214,042)
Loss on settlement of stock purchase note receivable (150,000) --
Loss on disposal of assets (87,587) (24,824)
Gain on settlement of accounts payable 131,691 69,654
Other, net 29,926 (1,945)
------------ ------------
Total expense, net (1,726,168) (1,141,920)
------------ ------------
Loss before provison for income taxes (4,155,199) (3,085,287)
Provision for income taxes 2,400 2,400
------------ ------------
Net loss $ (4,157,599) $ (3,087,687)
============ ============
Loss per common share - basic and diluted $ (0.11) $ (0.10)
============ ============
Weighted average number of common shares outstanding -
basic and diluted 37,222,102 29,944,592
============ ============
See report of independent registered public accounting firm and
notes to consolidated financial statements
F-3
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002
Common
Stock
Common Stock Purchase
---------------------- Paid-in Deferred Note Accumulated
Shares Amount Capital Compensation Receivable Deficit Total
---------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 17,989,454 $ 17,989 $ 8,901,273 $ -- $ -- $ (9,134,357) $ (215,095)
Cancellation of stock not issued (100,000) (100) 100 --
Issuance of stock for the reset
in the conversion
of the preferred stock 549,700 550 (550) --
Issuance of stock for the
acquisition of
Lazereye's assets (restated) 150,000 150 41,850 42,000
Issuance of stock for services 195,000 195 51,655 51,850
Issuance of stock for finders
fees (restated) 960,000 960 239,040 240,000
Issuance of warrants for finders
fees (restated) 172,200 172,200
Sale of common stock 15,000,000 15,000 1,110,000 (924,975) 200,025
Interest income on stock
purchase note (20,189) (20,189)
Exercise of options 50,000 50 450 500
Fair value of options issued
to employees 13,750 13,750
Beneficial conversion feature
and estimated
fair value of warrants
related to convertible debentures 2,100,000 2,100,000
Deferred compensation for
options granted to non-employees 119,137 (119,137) --
Amortization of deferred compensation 18,728 18,728
Net loss (3,087,687) (3,087,687)
---------- ------ ---------- -------- -------- ----------- ----------
Balance, December 31, 2002 34,794,154 34,794 12,748,905 (100,409) (945,164) (12,222,044) (483,918)
Common stock issued for
exercise of warrants 2,800,000 2,800 277,200 280,000
Common stock issued for
exercise of options 50,000 50 450 500
Interest income on stock purchase note (15,234) (15,234)
Convertible debt converted to
common stock 2,800,922 2,801 249,282 252,083
Beneficial conversion feature of
convertible debentures 1,000,000 1,000,000
Amortization of deferred compensation 33,468 33,468
Settlement of stock purchase note 960,398 960,398
Net loss (4,157,599) (4,157,599)
---------- ------ ---------- -------- -------- ----------- ----------
Balance, December 31, 2003 40,445,076 $ 40,445 $ 14,275,837 $ (66,941) $ -- $ (16,379,643) $ (2,130,302)
========== ====== ========== ======== ======== =========== ==========
See report of independent registered public accounting firm and
notes to consolidated financial statements
F-4
GOLFGEAR INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
(Restated)
Cash flows from operating activities:
Net loss $(4,157,599) $(3,087,687)
Adjustments to reconcile net loss to net cash used in
operating activities:
operating activities:
Amortization of debt discounts 1,181,961 940,261
Amortization of deferred compensation 33,468 18,728
Depreciation and amortization 58,274 52,078
Accrued interest on stock purchase note receivable (15,234) (20,189)
Provision for obsolete inventory -- 195,443
Write off of deferred advertising costs 602,364 --
Amortization of deferred financing costs 270,193 171,941
Provision for bad debts 31,668 53,899
Gain on settlement of accounts payable (131,691) (69,654)
Loss on settlement of stock purchase note
receivable 150,000 --
Stock options issued to employees below market
value -- 13,750
Loss on disposal of assets 87,587 24,824
Estimated fair value of stock issued to non-
employees for services -- 31,850
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 139,153 (20,360)
Inventories 323,525 2,918
Prepaid expenses (16,942) (35,603)
Deferred advertising costs (600) (581,764)
Deposits -- 4,630
Increase (decrease) in:
Accounts payable and accrued expenses 394,544 (89,065)
Accrued product warranties (24,419) 14,509
Accrued interest payable 99,683 81,011
Deferred licensing revenue (24,697) 75,000
Other liabilities -- (98,961)
-------- ----------
Net cash used in operating activities (998,762) (2,322,441)
-------- ----------
Cash flows used in investing activities:
Purchases of property and equipment (41,746) (31,981)
-------- ----------
See report of independent registered public accounting firm and
notes to consolidated financial statements
F-5
GOLFGEAR INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002 (continued)
Cash flows from financing activities:
Proceeds from execise of options and warrants 280,000 --
Proceeds from sale of convertible debentures to related parties 1,150,000 --
Proceeds from sale of convertible debentures -- 2,100,000
Proceeds from issuance of notes payable to stockholders -- 200,000
Repayment of common stock purchase note receivable 225,000 --
Repayment of convertible debt (700,000) --
Repayment of notes payable (10,000) (35,914)
Repayment of notes payable to stockholders -- (97,166)
Borrowings under bank lines of credit, net 38,329 13,794
Proceeds from issuance of common stock -- 200,025
Payment of deferred financing costs -- (29,934)
Proceeds from exercise of stock options 500 500
-------- ----------
Net cash provided by financing activities 983,829 2,351,305
-------- ----------
Net decrease in cash (56,679) (3,117)
Cash, beginning of year 117,018 120,135
-------- ----------
Cash, end of year $ 60,339 $ 117,018
======== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 110,444 $ 8,392
======== ==========
Cash paid for income taxes $ -- $ --
======== ==========
Supplemntal disclosure of non-cash investing and financing activities:
Deferred financing costs $ -- $ 412,200
======== ==========
Prepaid marketing costs $ -- $ 20,000
======== ==========
Deferred compensation $ -- $ 119,137
======== ==========
Issuance of common stock for the asset purchase of Lazereyes $ -- $ 42,000
======== ==========
Conversion of debt to common stock $ 252,083 $ --
======== ==========
Settlement of stock purchase note receivable for transfer of
accounts payable, notes payable and accrued interest $ 585,398 $ --
======== ==========
Due from stockholder for convertible debenture financing $ 100,000 $ --
======== ==========
Beneficial conversion feature and estimated fair value of warrants
related to convertible debentures $1,000,000 $ 2,100,000
========= ==========
See report of independent registered public accounting firm and
notes to consolidated financial statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
1. 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.
2. LIQUIDITY AND MANAGEMENT'S PLANS
During the third quarter of 2004, the Company suspended normal
operations, including expanding brands and product offerings, new
marketing programs, and direct marketing to customers, due to a lack of
operating working capital resources. To the extent that the Company is
unable to secure financing in 2005, the Company's liquidity and ability
to continue to conduct operations will be impaired.
The accompanying consolidated financial statements 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. Since inception, the
Company has incurred recurring losses and requires additional capital
to finance continuing operations. The Company incurred losses of
$4,157,599 and $3,087,687 for the years ended December 31, 2003 and
2002, respectively. As of December 31, 2003, the Company has a working
capital deficit of $2,243,712 and a stockholders' deficit of
$2,130,302. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern. The accompanying
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.
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 the next few years, 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 assurance that the Company will be successful in this
regard. To the extent 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.
As discussed in Note 17, the Company has secured a commitment for a
$10,000,000 private placement offering whereby a third party investor
will purchase up to $10,000,000 of the Company's common stock over a
twenty-four month period to provide the Company with operating capital.
Funding is subject to, among other things, the Company filing a
registration statement with the United States Securities and Exchange
Commission with respect to the resale of common stock sold in the
private placement offering. The Company is currently working towards
satisfying all conditions precedent to closing the funding, but there
can be no assurance that the Company will be successful in satisfying
these terms.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying 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.
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.
Significant estimates made by management are, among others, the
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
realizability of accounts receivable and inventories, recoverability of
long-lived assets, and valuation of deferred tax assets. Actual results
could differ from those estimates.
Concentration of Credit Risk
Cash
The Company maintains its cash in bank deposit accounts which are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. As of December 31, 2003 and 2002, the Company had deposits of
approximately $430,000 and $54,000, respectively, in excess of FDIC
limits.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company regularly monitors
its customer collections and payments and maintains a provision for
estimated credit losses based upon the Company's historical experience
and any specific customer collection issues that have been identified.
While such credit losses have historically been within the expectations
and the provisions established by the Company, there can be no
assurance that the Company will continue to experience the same credit
loss rates that have been experienced in the past.
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 excess
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 excess inventory is
applied against the reserve allowance. Once established, write-downs of
inventories are considered permanent adjustments to the cost basis of
the obsolete or excess inventories.
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. Maintenance and repairs
are charged to expense as incurred. Renewals and improvements of a
major nature are capitalized. At the time of retirement or other
disposition of property and equipment, the cost and accumulated
depreciation are removed from the accounts and any resulting gains or
losses are reflected in operations.
Business Combinations
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". SFAS No. 141 requires the use of the purchase method of
accounting for all business combinations completed after June 30, 2001.
The Company applied SFAS No. 141 to its acquisition of Lazereyes (see
Note 4).
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses the recognition
and measurement of goodwill and other intangible assets subsequent to
their acquisition. SFAS No. 142 also addresses the initial recognition
and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other
assets. This statement requires that intangible assets with finite
useful lives be amortized and that intangible assets with indefinite
lives and goodwill not be amortized but, be tested at least annually
for impairment. SFAS No. 142 also requires the Company to identify
reporting units for purposes of assessing potential impairments of
goodwill and reassess the useful lives of other intangible assets.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
Intangible Assets
Intangible assets include the cost of patents and trademarks, and are
being amortized on the straight-line basis over their estimated useful
lives, which vary from two to seventeen years.
Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company evaluates the carrying
value of long-lived assets for impairment whenever events or change in
circumstances indicate that such carrying values may not be
recoverable. Under SFAS No. 144, the Company estimates the future
undiscounted cash flows derived from an asset to assess whether or not
a potential impairment exists when events or circumstances indicate the
carrying value of a long-lived asset may differ. An impairment loss is
recognized when the undiscounted future cash flows are less than its
carrying amount. The Company uses its best judgment based on the most
current facts and circumstances surrounding its business when applying
these impairment rules to determine the timing of the impairment test,
the undiscounted cash flows used to assess impairments and the fair
value of a potentially impaired asset. Changes in assumptions used
could have a significant impact on the Company's assessment of
recoverability. At December 31, 2003, the Company determined that no
impairment loss was necessary. There can be no assurance, however, that
demand for the Company's products will continue, which could result in
impairment of long-lived assets in the future.
Deferred Financing Costs
Deferred financing costs represent costs incurred in connection with
the issuance of the convertible debentures. Deferred financing costs
are being amortized over the life of the convertible debentures on the
straight-line basis, which approximates the effective interest method.
Accumulated amortization of deferred financing costs was $171,941 at
December 31, 2002.
Beneficial Conversion Feature
The convertible feature of certain convertible notes provides for a
rate of conversion that is below market value (see Notes 10 and 11).
Such feature is normally characterized as a "beneficial conversion
feature" ("BCF"). Pursuant to Emerging Issues Task Force ("EITF") Issue
No. 98-5, "Accounting For Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratio" and
EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 To Certain
Convertible Instruments," the relative fair values of the BCFs have
been recorded as a discount to the face amount of the respective debt
instrument. The Company is amortizing the discount using the
straight-line method, which approximates the effective interest method,
through maturity of such instruments. The Company will record the
corresponding unamortized debt discount related to the BCF and the
warrants as interest expense when the related instrument is converted
into the Company's common stock.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts
receivable, due from stockholder, payables, accrued expenses, notes
payable and convertible debentures. The carrying value for all such
instruments, except the convertible debentures and due from
stockholder, considering the terms, approximates fair value at December
31, 2003. The fair value of due from stockholder is not determinable as
the transaction is with a related party. The fair value of convertible
debentures is not determinable as equivalent instruments could not be
located.
Revenue Recognition
Revenue is recognized in accordance with Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements", as
revised by SAB 104. The Company recognizes revenue when products are
shipped to a customer and the risks and rewards of ownership and title
have passed based on the terms of sale. The Company records a provision
for sales returns and claims based upon historical experience. Actual
returns and claims in any future period may differ from the Company's
estimates.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
Amounts billed to customers for shipping and handling fees are included
in net sales, and freight costs incurred related to these fees are
included in cost of goods sold in accordance with EITF Issue No. 00-01,
"Accounting for Shipping and Handling Fees and Costs."
Licensing revenue is recognized when earned per the terms of royalty
agreements. Occasionally, licensees pay royalties in advance, which are
recorded as deferred licensing revenue in the accompanying consolidated
balance sheets until such time they are earned.
Product Warranties
The Company generally provides a lifetime warranty against defects. The
Company maintains a reserve for its product warranty liability based on
estimates calculated using historical warranty experience. While
warranty costs have historically been within the Company's
expectations, there can be no assurance that the Company will continue
to experience the same warranty return rates or repair costs as in
prior years. A significant increase in product return rates, or a
significant increase in the costs to repair product, could have a
material adverse impact on the Company's operating results.
Warranty liability activity for the years ended December 31, 2003 and
2002 was as follows:
2003 2002
--------- ---------
Balance as of January 1 $ 116,102 $ 101,593
Provisions for warranty expense 20,540 14,509
Warranty claims and expenses (44,959) --
--------- ---------
Balance as of December 31, $ 91,683 $ 116,102
========= =========
Advertising
The Company expenses advertising costs as incurred, except
certain direct-response advertising costs. Direct-response advertising
costs are capitalized as incurred and then expensed when the related
advertising program is aired. Direct-response advertising costs
capitalized during the years ended December 31, 2003 and 2002 were $600
and $601,764, respectively. During the year ended December 31, 2003,
the direct-advertising program aired, and accordingly, all costs
related to the program were expensed in 2003.
Advertising costs for the years ended December 31, 2003 and 2002 were
$794,947 (including $602,364 related to direct-response advertising
costs) and $145,575, respectively, which is included in selling and
marketing expenses in the accompanying consolidated statements of
operations.
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.
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.
Stock-based awards to non-employees are accounted for using the fair
value method in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," and EITF Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services." All
transactions in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The
measurement date used to determine the fair value of the equity
instrument issued is the earlier of the date on which the third-party
performance is complete or the date on which it is probable that
performance will occur.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," effective for fiscal years
ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123 to
provide alternative methods of transition to the fair value method of
accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 to require disclosure
in the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No.
123 to require companies to account for their employee stock-based
awards using the fair value method. The disclosure provisions are
required, however, for all companies with stock-based employee
compensation, regardless of whether they utilize the fair value method
of accounting described in SFAS No. 123 or the intrinsic value method
described in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees."
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB Opinion No. 25. As
permitted by SFAS No. 123, as amended by SFAS No. 148, the Company has
chosen to continue to account for its employee stock-based compensation
plan under APB Opinion No. 25 and provide the expanded disclosures
specified in SFAS No. 123, as amended by SFAS No. 148. Had employee
stock based compensation cost been determined using the fair value
method, the Company's net loss and loss per share would have been
adjusted to the pro forma amounts indicated below:
For the Years Ended December 31,
2003 2002
----------- -----------
Net loss as reported $(4,157,599) $(3,087,687)
Deduct: Total stock-based employee
compensation under fair value based
method for all awards, net of related
tax effects (148,334) (184,449)
----------- -----------
Pro forma net loss $(4,305,933) $(3,272,136)
=========== ===========
Basic and diluted loss per share - as reported $ (0.11) $ (0.10)
=========== ===========
Basic and diluted loss per share - pro forma $ (0.12) $ (0.11)
=========== ===========
Basic and Diluted Loss Per Share
Basic earnings (loss) per common share are computed based on the
weighted average number of shares outstanding for the period. Diluted
earnings (loss) per share is computed by dividing net income (loss) by
the weighted average shares outstanding assuming all dilutive potential
common shares are issued. Basic and diluted loss per share is the same
as the effect of stock options and warrants on loss per share are
anti-dilutive and thus not included in the diluted loss per share
calculation. However, the impact under the treasury stock method of
dilutive stock options and warrants would have been 2,800,000 and
9,450,000 incremental shares for the years ended December 31, 2003 and
2002, respectively.
Segment and Geographic Information
The Company operates in one business segment. The Company sells to
customers in the United States, and the Far East. Sales for the year
ended December 31, 2003 to customers in the United States and
internationally were $1,897,150 and $75,985, respectively. Sales for
the year ended December 31, 2002 to customers in the United States and
internationally were $1,399,035 and $147,199, respectively.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
Concentrations of Major Customers
During the year ended December 31, 2003, one customer accounted for 39%
of net sales. At December 31, 2003, one customer accounted for 86% of
net accounts receivable. During the year ended December 31, 2002, two
customers accounted for 25% of net sales. At December 31, 2002, one
such customer accounted for 49% of net accounts receivable.
Supplier Concentration
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 affect 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.
Reclassifications
Certain prior period balances have been reclassified to conform to the
current year presentation.
New Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
The initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company's adoption of FIN 45 did not have
a material impact on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123." 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 employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of
SFAS No. 148 are effective for financial statements issued for fiscal
years ending after December 15, 2002. The interim disclosure provisions
are effective for financial reports containing financial statements for
interim periods beginning after December 15, 2002. The Company has
applied the disclosure provisions of SFAS No. 148 in its financial
statements and the accompanying notes.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin 51, Consolidated Financial Statements," to
improve financial reporting of special purpose and other entities. In
accordance with the interpretation, business enterprises that represent
the primary beneficiary of another entity by retaining a controlling
financial interest in that entity's assets, liabilities, and results of
operations must consolidate the entity in their financial statements.
Prior to the issuance of FIN 46, consolidation generally occurred when
an enterprise controlled another entity through voting interests. FIN
46 is effective immediately for all new variable interest entities
created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not expect FIN 46 to
have a material impact on its financial statements as it has no
variable interest entities.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for the classification and
measurement of certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 also includes required
disclosures for financial instruments within its scope. For the
Company, SFAS No. 150 was effective for instruments entered into or
modified after May 31, 2003 and otherwise will be effective as of
January 1, 2004, except for mandatory redeemable financial instruments.
For certain mandatory redeemable financial instruments, SFAS No. 150
will be effective for the Company on January 1, 2005. The Company is in
process of evaluating whether the adoption of SFAS No. 150 will have a
significant impact on the Company's overall results of operations or
financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No.
151 clarify that abnormal amounts of facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company is in
the process of evaluating whether the adoption of SFAS No. 151 will
have a significant impact on the Company's overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS
No. 123(R)"), "Share-Based Payment," to provide investors and other
users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements.
That cost will be measured based on the fair value of the equity or
liability instruments issued. Statement No. 123(R) covers a wide range
of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS No. 123(R) replaces
SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123, as
originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with
employees. However, that statement permitted entities the option of
continuing to apply the guidance in APB Opinion No. 25, as long as the
footnotes to financial statements disclosed what net income would have
been had the preferable fair-value-based method been used. The Company
will be required to apply SFAS No. 123(R) as of January 1, 2006. The
Company is in the process of evaluating whether the adoption of SFAS
No. 123(R) will have a significant impact on the Company's overall
results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." This statement amends APB Opinion No. 29 to
eliminate the exceptions for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance.
A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of
the exchange. The provisions for SFAS No. 153 are effective for
nonmonetary asset exchanges incurred during fiscal years beginning
after June 15, 2005. The Company is currently evaluating the effect, if
any, of adopting SFAS No. 153.
4. ACQUISITION
On July 1, 2002, the Company acquired all of the operating assets of
Lazereyes Golf, LLC and Stone Pine Lazereyes, LLC, both Colorado
limited liability companies (collectively, "Lazereyes"), including the
"Lazereyes" trade name. Lazereyes designs, assembles and sells golf
training clubs. Lazereyes is operated as a separate division of the
Company.
Total purchase consideration was 150,000 shares of the Company's
restricted common stock valued at $42,000. The Company assumed no
liabilities in the acquisition transaction. As additional purchase
consideration, the Company agreed to pay the former owners of Lazereyes
$1.50 for every Lazereyes training club sold for a period of two years
from July 1, 2002 through June 30, 2004. For the years ended December
31, 2003 and 2002, no additional consideration was due and payable to
the former owners of Lazereyes.
The acquisition was accounted for under the purchase method of
accounting, and accordingly, the Company has recorded the assets
acquired based on their estimated fair values at the date of
acquisition. The total purchase price of $42,000 was allocated to
trademarks and patents acquired. To date, there have been no operations
associated with Lazereyes.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
During the years ended December 31, 2003, the Company determined that
the intangible assets acquired were impaired due to no operating
activities in the Lazereyes division. As a result, the Company wrote
off the unamortized balance of the intangible assets of $17,500, which
is included in depreciation and amortization expense in the
accompanying consolidated statement of operations.
5. INVENTORIES
At December 31, 2003 and 2002, inventories consist of the following:
2003 2002
-------- --------
Component parts $100,026 $189,616
Finished goods 69,353 303,288
-------- --------
$169,379 $492,904
======== ========
6. PROPERTY AND EQUIPMENT
At December 31, 2003 and 2002 property and equipment consists of the
following:
2003 2002
--------- ---------
Machinery and equipment $ 23,143 $ 23,143
Office equipment 9,532 16,024
Computers and software 18,781 28,810
Furniture and fixtures 6,654 12,460
Automobile 52,091 52,091
Trade show booth -- 58,538
Tooling -- 26,090
--------- ---------
110,201 217,156
Less accumulated depreciation (76,152) (118,416)
--------- ---------
$ 34,049 $ 98,740
========= =========
Depreciation expense for the years ended December 31, 2003 and 2002 was
$18,850 and $37,171, respectively.
7. INTANGIBLE ASSETS
At December 31, 2003 and 2002, intangible assets consist of the
following:
2003 2002
------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- -------------- -------------- --------------
Patents $ 227,210 $ 155,619 $ 227,210 $ 133,695
Trademarks 78,408 78,408 78,408 60,908
-------------- -------------- -------------- --------------
$ 305,618 $ 234,027 $ 305,618 $ 194,603
============== ============== ============== ==============
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
Amortization expense related to the acquired intangible assets was
$39,424 and $14,907 for the years ended December 31, 2003, and 2002,
respectively. Estimated amortization expense for each of the next five
years ended December 31 is as follows:
Years Ending December 31,
------------------------
2004 $ 9,663
2005 9,663
2006 9,663
2007 9,663
2008 9,663
During the year ended December 31, 2003, the Company determined that
the intangible assets acquired in connection with the Lazereyes
acquisition were impaired. As a result, the Company wrote off the
unamortized balance of the patents and trademarks of $17,500, which is
included in amortization expense in the accompanying consolidated
statement of operations.
8. BANK LINES OF CREDIT
The Company had a $250,000 bank line collateralized by eligible
accounts receivable. The line of credit originally matured on December
9, 2003 and was extended to June 2004. Outstanding borrowings bore
interest at 28% annually. Interest was payable monthly. Outstanding
borrowings under this line at December 31, 2003 and 2002 were $52,905
and $26,253, respectively. This credit line was closed and paid in full
in June 2004. The Company also had an unsecured $70,000 line of credit
with another bank. Interest was payable monthly at a variable rate (10%
at December 31, 2003 and 10.25% at December 31, 2002). Outstanding
borrowings at December 31, 2003 and 2002 were $56,318 and $44,641,
respectively. This line of credit was closed and paid in full in
September 2004. Interest expense related to the bank lines of credit
was $36,445 and $12,392 for the years ended December 31, 2003 and 2002,
respectively.
9. NOTES PAYABLE
At December 31, 2003 and 2002, notes payable consisted of the
following:
2003 2002
-------- --------
Notes payable to individuals, payable on
demand plus interest at rates ranging from
prime to 8% $ 33,177 $ 83,177
Less current portion (33,177) (83,177)
-------- --------
$ -- $ --
======== ========
Interest expense related to the notes payable was $4,658 and $3,356 for
the years ended December 31, 2003 and 2002, respectively. Accrued
interest at December 31, 2003 and 2002 was $6,080 and $3,356,
respectively.
10. RELATED PARTY DEBT
Note Payable to Stockholder
On November 20, 2002, the Company entered into a loan agreement with
Peter Pocklington, its Chairman, 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 due from Wyngate Limited ("Wyngate"), a company
affiliated with Mr. Pocklington, for the purchase of 15,000,000 shares
of common stock (the "Stock Purchase Note") (see Note 15). The loan
bore interest at 9.5% and was due on June 20, 2003.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
On July 17, 2003, Mr. Pocklington, Wyngate and Quincy Investments
Corp., a company affiliated with Mr. Pocklington ("Quincy")
(collectively, the "Parties") jointly and collectively entered into an
agreement with the Company whereby, among other things, the Parties
satisfied a portion of the then outstanding balance of the Stock
Purchase Note by offsetting the $200,000 note payable to stockholder,
including accrued interest of $14,710, against the Stock Purchase Note
(see Note 15).
Interest expense related to the note payable to stockholder was $14,446
and $264 for the years ended December 31, 2003 and 2002, respectively.
Accrued interest at December 31, 2002 was $264.
Convertible Debentures Due to Related Parties
On October 7, 2003, the Company completed the sale of $250,000 of 5%
convertible debentures to MC Corporation, a company affiliated with a
Company director and stockholder ("MC Corp"). These debentures were
convertible into common stock at $0.09 per share for a period of three
months from the date of issuance. For each share of common stock issued
upon conversion of the debentures, one common stock purchase warrant
will be issued and will be exercisable for a period of twelve months at
$0.045 per share. Issuance costs were not significant. The estimated
value of the beneficial conversion feature was not significant at the
date of issuance. In December 2003, these debentures, including accrued
interest of $2,083, were converted into 2,800,922 shares of common
stock. The warrants expired unexercised.
On December 30, 2003, the Company completed the sale of $1,000,000 of
5% convertible debentures to Quincy and MC Corp. The debentures were
automatically convertible into 525,000 shares of Series A preferred
stock of the Company within ninety days of the date of issuance.
Pursuant to the terms of the debenture agreement, if the Company was
unable to convert the debentures into shares of Series A preferred
stock within ninety days of issuance, the debentures would become
immediately due and payable in full, with interest continuing to accrue
at the face rate of interest of 5% per annum. As of December 31, 2003,
the Company had not received $100,000 in proceeds from Quincy, and
accordingly, the Company recorded $100,000 due from stockholder in the
accompanying consolidated balance sheet. The amount was subsequently
received in January 2004. As of May 10, 2005, the debentures are in
default and are due on demand.
Holders of the Series A preferred stock have the right to convert the
Series A preferred stock into shares of common stock of the Company at
conversion rates of 158:1 for Quincy and 161:1 for MC Corp. upon any of
the following: (i) eighteen months after the date of issuance of the
Series A preferred stock, (ii) a change of control, as defined, or
(iii) upon the date the Company is no longer required to file reports
or financial statements with the United States Securities Exchange
Commission.
The conversion feature of the convertible debentures provides for a
rate of conversion that is below market value, resulting in a
beneficial conversion feature. The Company estimated the fair value of
the beneficial conversion feature to be $1,000,000 at date of issuance,
and recorded such conversion feature as a debt discount, which will be
amortized to interest expense over the term of the debentures. The
Company recorded interest expense of $22,222 during 2003 related to the
amortization of the debt discount.
11. CONVERTIBLE DEBENTURES
On June 6, 2002, the Company completed the sale of $2,100,000 of 7%
convertible debentures. The debentures are convertible into common
stock at $0.25 per share for the period of 12 months commencing six
months after the initial sale of the debentures, and were due in
December 2003. The Company's patents, trademarks, and other intangible
assets secure 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 at $0.10 per share for a
period of 18 months from the date of conversion.
The conversion feature of the convertible debentures provides for a
rate of conversion that is below market value, resulting in a
beneficial conversion feature. The Company estimated the fair value of
the beneficial conversion feature to be $2,100,000 at date of issuance,
and recorded such conversion feature as a debt discount, which will be
amortized to interest expense over the term of the debentures. On
December 16, 2002, the Company's Board of Directors approved a
modification to the original debenture agreement to provide for the
exercise of warrants prior to the conversion of the debentures. The
Company estimated the fair value of the warrants at the date of the
modification and reallocated $600,000 of the original debt discount of
$2,100,000 to the warrants based on the relative fair values of the
warrants and beneficial conversion feature as of December 16, 2002. The
estimated fair value of the warrants will be amortized over
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
the remaining term of the debentures.
In connection with the issuance of the debentures, the Company issued
420,000 shares of the Company's common stock valued at $105,000 to
Wyngate as a finder's fee. In addition, the Company granted Wyngate a
warrant to purchase 420,000 shares of the Company's common stock at an
exercise price of $0.10 per share, which were exercisable for a period
of eighteen months. The warrants were valued at $172,200 using the
Black-Scholes option-pricing model. In addition, the Company issued
540,000 shares of the Company's common stock valued at $135,000 as a
finder's fee to an unrelated third party. The Company also paid legal
fees of $29,934 related to the financing.
The costs incurred in connection with the financing were capitalized as
deferred financing costs and are being amortized over the term of the
convertible debentures. Amortization of deferred financing costs was
$270,193 and $171,941 during the years ended December 31, 2003 and
2002, respectively, and is included in interest expense in the
accompanying consolidated statements of operations.
During the year ended December 31, 2003, the Company repaid $700,000 in
debentures, including accrued interest. As of December 31, 2003,
$1,400,000 in debentures are in default. In January and February 2004,
the Company repaid an additional $200,000 in debentures, including
accrued interest, which was satisfied with approximately $122,000 cash
and inventories valued at $100,000. The Company continues to accrue
interest on all outstanding debentures at the face rate of interest.
Interest expense related to the convertible debentures was $1,317,754
and $1,026,089 for the years ended December 31, 2003 and 2002,
respectively, of which $1,159,739 and $940,261, respectively, related
to the amortization of the debt discount. Accrued interest at December
31, 2003 and 2002 was $166,259 and $85,829, respectively.
As a requirement of the transaction, Mr. Pocklington was made Chairman
of the Board. In connection with the transaction, Mr. Pocklington was
given the right to merge Meditron with the Company (see Note 15).
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities and various equipment under
non-cancelable operating leases which expire at various dates through
February 2006.
In December 2003, the Company entered into a five-year lease for a
facility in Rancho Mirage, California. In May 2004, the Company closed
this facility. The landlord has filed a complaint against the Company
and is seeking $40,040 in damages. Prior to June 2004, the Company was
leasing its corporate facility in Huntington Beach, California under a
non-cancelable operating lease, which was scheduled to expire in July
2005. In June 2004, the Company relocated its corporate facility to
Garden Grove, California. In March 2005, the landlord of the Huntington
Beach facility was awarded a judgment in the amount of approximately
$25,800, and the Company was released from its obligation under this
office lease.
The Company is currently leasing a 2,000 square foot corporate facility
in Garden Grove, California under a non-cancelable operating lease
which expires on August 31, 2005. The lease requires monthly base rent
of $1,740, plus monthly common area maintenance charges.
Future annual minimum lease payments required under these
non-cancelable operating leases is as follows at December 31, 2003
(excluding the Huntington Beach and Rancho Mirage facility leases):
Year Ended December 31,
-----------------------
2004 $ 21,429
2005 14,712
2006 132
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
Litigation
On December 18, 2003, the Company received a resignation letter from
Donald A. Anderson as a member of the Board of Directors of the
Company. On December 19, 2003, Mr. Anderson also resigned as Chief
Executive Officer of the Company. Prior to his resignation, on or about
November 8, 2003, Mr. Anderson was suspended pending an investigation
into possible violations of his employment contract with the Company
and breach of fiduciary duty.
On November 18, 2003, Mr. Anderson filed a complaint against the
Company and its officers for breach of written contract, wrongful
termination of employment and slander. Subsequently, the Company filed
a cross complaint against Mr. Anderson for, among other things, breach
of fiduciary duty and breach of written contract.
On June 23, 2004, the Company, its officers and Mr. Anderson entered
into a Settlement Agreement (the "Settlement Agreement"), wherein,
among other things, the Company withdrew its allegation that Mr.
Anderson breached his fiduciary duties. Pursuant to the terms of the
Settlement Agreement, the Company agreed to (i) pay Mr. Anderson
$165,000 in varying installments through January 30, 2006, (ii)
transfer the title of a 1996 Ford custom tour van (with a net book
value of approximately $7,000) owned by the Company to Mr. Anderson,
and remove Mr. Anderson as a guarantor from certain Company debt
obligations. In return, Mr. Anderson returned to the Company 994,110
shares of the Company's common stock owned by him valued at
approximately $30,000 (fair market value of the Company's stock on the
settlement date). As of December 31, 2003, the Company recorded a net
liability of approximately $142,000 related to the settlement of this
lawsuit. Mr. Anderson also agreed to convert $60,000 in debentures,
including accrued interest, held by him into shares of the Company's
common stock at a conversion rate of $0.095 per share. These debentures
were converted into 753,000 shares of the Company's common stock on
February 23, 2005.
The Company is currently in default for payment of amounts due to Mr.
Anderson under the Settlement Agreement. On February 15, 2005, Mr.
Anderson received a judgment for $76,310 due to him under the terms of
the Settlement Agreement. Pursuant to the Settlement Agreement, the
Company agreed to issue a new stock certificate to Mr. Anderson for a
stolen stock certificate for 2,642,625 shares of the Company's common
stock. As of May 10, 2005, the Company has not issued this stock
certificate. Mr. Anderson will dismiss the lawsuit upon the Company's
full performance of the Settlement Agreement.
In March 2004, holders in the amount of $200,000 of the Company's
convertible debentures filed suit against the Company claiming, among
other things, breach of written contract and default under security
agreement and possession of collateral. The plaintiffs are seeking
repayment of the principal amount of the debentures, including accrued
interest, which matured on January 6, 2004, and possession of the
intellectual property, including patents and trademarks, which
collateralized the debentures. The parties are currently attempting to
reach agreement on resolving this action in its entirety.
On May 30, 2002, the Company entered into a settlement agreement and
mutual release with MC Corp. which provided for the Company to issue
549,700 shares of the Company's common stock to MC Corporation.
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.
Indemnities and Guarantees
The Company has executed certain contractual indemnities and
guarantees, under which it may be required to make payments to a
guaranteed or indemnified party. The Company also has agreed to
indemnify its directors, officers, employees and agents to the maximum
extent permitted under the laws of the State of Nevada. In connection
with a certain facility lease, the Company has indemnified its lessor
for certain claims arising from the use of the facilities. The duration
of the guarantees and indemnities varies, and in many cases is
indefinite. These guarantees and indemnities do not provide for any
limitation of the maximum potential future payments the Company could
be obligated to make. Historically, the Company has not been obligated
to make any payments for these obligations and no liabilities have been
recorded for these indemnities and guarantees in the accompanying
consolidated balance sheets.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
13. RELATED PARTY TRANSACTIONS
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 offering in the amount of
$160,000 in the aggregate (see Note 11). See Notes 10, 11 and 15 for
additional related party transactions.
14. INCOME TAXES
For the years ended December 31, 2003 and 2002, the provision for
income taxes consists of the following:
2003 2002
------ ------
Current:
Federal $ -- $ --
State 2,400 2,400
------ ------
2,400 2,400
------ ------
Deferred:
Federal -- --
State -- --
------ ------
$2,400 $2,400
====== ======
The reconciliation of the effective tax rate to the federal statutory
rate is as follows for the years ended December 31:
2003 2002
------- ------
Federal income tax rate -34.00% -34.00%
Interest expense on
convertible debt 9.43% 10.30%
Increase on valuation
allowance 24.22% 22.92%
Other 0.41% 0.86%
------- ------
0.06% 0.08%
======= ======
The tax effects of the major items recorded as deferred tax assets and
liabilities at December 31, 2003 and 2002 are as follows:
2003 2002
----------- -----------
Net operating loss carryforwards $ 4,385,821 $ 3,096,331
Receivable and inventory allowances 21,297 145,736
Accruals 153,762 155,112
Other 4,034 7,462
----------- -----------
4,564,914 3,404,641
Valuation allowance (4,564,914) (3,404,641)
----------- -----------
$ -- $ --
=========== ===========
Deferred income taxes are provided for the tax effects of net operating
loss carry-forwards 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 bad debts, inventory reserves and accruals.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
As of December 31, 2003, the Company has federal and state net
operating loss carry-forwards of approximately $11,124,000 and
$6,794,000, respectively. The carry-forwards expire through 2018 for
federal and state purposes. The deferred tax benefit has been offset by
a valuation allowance due to the realization of these carry-forwards
being doubtful. No deferred tax asset has been recognized in the
financial statements due to this uncertainty.
15. STOCKHOLDERS' EQUITY
Stock Purchase Agreement
On April 8, 2002, the Company entered into a stock purchase agreement
(the "Agreement") with 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 Stock Purchase Note with interest at 2.88% per annum in favor of the
Company for the balance of $924,975. Pursuant to the Stock Purchase
Note, the balance was due and payable October 8, 2003. The Stock
Purchase 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 Stock Purchase Note. As
additional consideration for lending the Company $200,000 as described
in Note 10, 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 Stock Purchase Note.
In conjunction with the 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 (see Note 11) in an aggregate amount ranging from a minimum
of $2,000,000 to a maximum of $4,000,000, which would have been
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 11).
The Company's patents, trademarks, and other intangible assets secured
the debentures.
The Agreement also provided that Peter H. Pocklington had the right for
an 18 month period to merge Meditron Medical, Inc. ("Meditron"), a
Canadian corporation controlled by Mr. Pocklington, into the Company 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
Meditron was to be determined by obtaining a fairness opinion from a
reliable investment banking firm. Meditron is engaged in the medical
manufacturing sales business.
On July 17, 2003, Mr. Pocklington, Wyngate and Quincy (collectively,
the "Parties") jointly and collectively entered into an agreement with
the Company whereby the Parties satisfied the then outstanding balance
of the Stock Purchase Note of $924,975, including accrued interest of
$35,423, in exchange for (i) a cash payment of $225,000, (ii) the
conversion of the $200,000 note payable to stockholder, including
accrued interest of $14,710 to equity (see Note 10), (iii) the
cancellation of Meditron's right (valued at $150,000 and recorded as a
loss on settlement of stock purchase note receivable) to merge with the
Company, and (iv) the assumption of $370,688 of the Company's existing
notes payable and certain accounts payable obligations.
During 2002, the Company issued 195,000 shares valued at $51,850 in
connection with services provided by consultants.
Warrants
From time to time, the Company issues warrants in connection with its
financing and consulting agreements. Information regarding the
Company's warrant activity for the years ended December 31, 2003 and
2002 is as follows:
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
Shares Underlying Weighted Average Weighted Average
Warrants Exercise Price Fair Value Exercisable
-----------------------------------------------------------------------------
Balance, January 1, 2002 1,281,064 $ 0.56 1,281,064
Granted 8,820,000 $ 0.10 $ 0.50
Canceled (443,564) $ 0.89
--------- ----------
Balance, December 31, 2002 9,657,500 $ 0.14 9,657,500
Granted 2,800,922 $ 0.05 $ 0.05
Exercised (2,800,000) $ 0.10
Canceled (2,847,500) $ 0.11
---------
Balance, December 31, 2003 6,810,922 $ 0.13 6,810,922
========= =========
During the year ended December 31, 2002, the Company issued 8,400,000
warrants to purchase shares of the Company's common stock in connection
with the $2,100,000 convertible debenture financing (see Note 11). In
addition, the Company issued 420,000 warrants as finder's fees in
connection with the $2,100,000 convertible debenture financing (see
Note 11).
During the year ended December 31, 2003, the Company issued 2,800,922
warrants in connection with the conversion of debentures due to MC Corp
(see Note 10). During 2003, the Company received $280,000 in proceeds
from the exercise of 2,800,000 warrants held by certain convertible
debenture holders.
The following table summarizes the information about warrants
outstanding at December 31, 2003:
Shares Underlying Weighted Average Remaining
Exercise Price Warrants Contractual Life Exercisable
------------------------------------------------------------------------------
$ 0.05 2,800,922 1 2,800,922
$ 0.10 3,200,000 1 3,200,000
$ 0.35 390,000 1 390,000
$ 0.50 250,000 1 250,000
$ 1.00 150,000 1 150,000
$ 1.06 20,000 1 20,000
---------- ----------
6,810,922 6,810,922
========== ==========
Stock Options
In October 1997, the Board of Directors of the Company approved the
GolfGear International, Inc. 1997 Stock Option Plan (the "1997 Plan").
The 1997 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
1997 Plan. The 1997 Plan has reserved 2,642,625 shares of the Company's
common stock, subject to adjustments, to be issued under the 1997 Plan.
The 1997 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 1997
Plan.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
The exercise price per share of incentive stock options granted under
the 1997 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 1997 Plan will terminate
unless assumed or substituted by the successor corporation. As of
December 31, 2003, 1,348,330 options have been granted and 1,294,295
options are available for grant under the 1997 Plan.
Activity regarding the Company's stock options for the years ended
December 31, 2003 and 2002 is as follows:
Weighted Weighted
Shares Average Average
Underlying Exercise Fair
Options Price Value Exercisable
----------- -------- -------- -----------
Balance, January 1, 2002 2,711,601 $ 0.74 2,711,601
Granted 10,208,332 $ 0.22 $ 0.22
Canceled (824,936 $ 0.62
Exercised (50,000) $ 0.01
---------- -----------
Balance, December 31, 2002 12,044,997 $ 0.31 5,532,497
Granted 33,332 $ 0.25 $ 0.13
Canceled (6,671,667) $ 0.25
Exercised (50,000) $ 0.01
----------- ----------
Balance, December 31, 2003 5,356,662 $ 0.39 5,281,662
===========
The following table summarizes the information about stock options
outstanding at December 31, 2003:
Weighted
Shares Average
Exercise Underlying Remaining
Price Options Contractual Life Exercisable
--------- ------------ ---------------- -----------
$ 0.10 1,000,000 9.0 1,000,000
$ 0.20 2,353,333 9.0 2,353,333
$ 0.25 83,329 2.5 83,329
$ 0.31 100,000 9.0 25,000
$ 0.50 1,315,000 2.5 1,315,000
$ 0.55 325,000 2.0 325,000
$ 1.50 50,000 2.0 50,000
$ 2.50 15,000 2.0 15,000
$ 3.50 50,000 2.0 50,000
$ 4.50 25,000 2.0 25,000
$ 5.50 15,000 2.0 15,000
$ 6.50 25,000 2.0 25,000
----------- -----------
5,356,662 5,281,662
=========== ===========
The Company has consulting agreements with two non-employees. Under
these consulting agreements there have been 1,100,000 options granted
in 2002 with an estimated value of $119,137. The estimated fair value
of the options is accounted for as deferred compensation and is being
amortized over the life of the agreements.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
During 2002, the Company issued options to an employee below the fair
market value of the common stock on the date of grant. Accordingly, the
Company recorded compensation expense of $13,750 related to the
issuance of these stock options.
The fair value of the warrants and options granted is estimated on the
date of grant using the Black-Scholes option pricing model with
following weighted-average assumptions for 2003 and 2002: dividend
yield of 0%; volatility of 72% and 83%, respectively; risk-free
interest rate of 3.66% and 3.63%, respectively, and an expected life of
five years.
16. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the year ended December 31, 2003, the Company determined that
the manner in which it accounted for the beneficial conversion option
on the sale of its $2,100,000 of convertible debentures in 2002 was not
in accordance with Emerging Issues Task Force Issue No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments,"
which states that the debt discount resulting from recording a
beneficial conversion option should be accreted from the date of
issuance to the stated redemption date of the convertible instrument,
regardless of when the earliest conversion date occurs. Accordingly, in
connection with the restatement adjustments, the Company has
appropriately reflected the amortization of the debt discount resulting
from the recording of the beneficial conversion option over the term of
the convertible debentures. The Company had previously recorded the
amortization of the debt discount over the earliest period that the
convertible debentures could be converted.
During the year ended December 31, 2003, the Company also determined
that certain transactions involving the issuance of its common stock
were not recorded appropriately in 2002. During 2002, the Company
acquired the operating assets of Lazereyes and issued 150,000 shares of
its common stock valued at $42,000 as purchase consideration. In
connection with the restatement adjustments, the Company has reflected
the value of the purchase consideration at $42,000 and amortized the
additional purchase consideration that was allocated to acquired
intangibles. The Company had previously recorded the purchase
consideration as 100,000 shares of its common stock valued at $28,000.
In addition, during 2002 the Company issued 960,000 shares of its
common stock valued at $240,000 and warrants valued at $172,200 as
deferred financing costs in connection with the $2,100,000 convertible
debenture financing. The Company had previously recorded 1,072,000
shares of its common stock valued at $268,000 and warrants valued at
$218,120 as deferred financing costs. Accordingly, in connection with
the restatement adjustments, the Company has reflected the appropriate
number of shares issued and the associated value, and amortized the
adjusted amount over the term of the convertible debentures.
The following tables present a summary of the effects of the
restatement adjustments on the Company's consolidated balance sheet at
December 31, 2002, and the statements of operations and cash flows for
the year ended December 31, 2002:
Consolidated statement of operations:
As previously
reported Adjustments As restated
--------------------------------------------------
Interest expense $ 2,402,528 $(1,188,486) $ 1,214,042
Amortization and depreciation 48,578 3,500 52,078
Net loss (4,272,673) 1,184,986 (3,087,687)
Loss per common share -
basic and diluted $ (0.14) $ 0.04 $ (0.10)
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 AND 2002
Consolidated balance sheet:
As previously reported Adjustments As restated
---------------------------------------------------------------
Intangible assets, net $ 100,515 $ 10,500 $ 111,015
Deferred financing costs, net 315,366 (45,173) 270,193
Total assets 2,094,346 (34,673) 2,059,673
Convertible debentures 2,100,000 (1,159,739) 940,261
Total current liabilities 3,703,330 (1,159,739) 2,543,591
Common stock 34,856 (62) 34,794
Additional paid in capital 12,808,763 (59,858) 12,748,905
Accumulated deficit (13,407,030) 1,184,986 (12,222,044)
Total stockholders' equity (1,608,984) 1,125,066 (483,918)
Total liabilities and stockholders' equity 2,094,346 (34,673) 2,059,673
Consolidated statement of cash flows:
As previously
reported Adjustments As restated
------------- ----------- -----------
Net cash used in operating activities $ (2,352,375) $ 29,934 $(2,322,441)
Net cash provided by financing activities 2,381,239 (29,934) 2,351,305
17. SUBSEQUENT EVENTS
From January 2004 through March 2005, a director and stockholder has
advanced $237,300 to the Company to be used for working capital. The
Company has received these funds and recorded them as loans from
stockholder of $185,600 during 2004 and $51,700 during 2005.
During the third quarter of 2004 the Company suspended normal
operations, including expanding brands and product offerings, new
marketing programs, and direct marketing to customers, due to a lack of
operating working capital resources. To the extent that the Company is
unable to secure financing in 2005, the Company's liquidity and ability
to continue to conduct operations will be impaired.
On January 14, 2005, the Company secured a commitment for a $10,000,000
private placement offering whereby a third party investor (the
"Investor") will purchase up to $10,000,000 of the Company's common
stock over a twenty-four month period to provide the Company with
operating capital. Funding is subject to, among other things, the
Company filing a registration statement with the U.S. Securities and
Exchange Commission with respect to the resale of common stock sold in
the private placement offering. The Company is currently working
towards satisfying all conditions precedent to closing the funding, but
there can be no assurance that the Company will be successful in
satisfying these terms. In connection with the funding commitment, the
Company paid a structuring fee of $10,000 and issued 2,000,000 shares
of the Company's common stock to the Investor as a commitment fee.
On February 23, 2005 a debenture for $60,000, including accrued
interest, was converted to 753,000 shares of the Company's common stock
(see Note 11).
F-24
Item 8: Changes IN and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements with the Company's independent
registered public accounting firm on accounting or financial disclosure.
On October 21, 2003 the Company received notice from its then current
auditors, Good, Swartz, Brown and Berns, LLP ("GSBB"), that they will no longer
provide audit services to SEC reporting companies. Effective November 8, 2003
the Board of Directors approved the engagement of Corbin & Company, ("C&C) as
its independent registered public accounting firm for the fiscal year ended
December 31, 2003. The Company did not consult with C&C prior to their
retention. During the past two years, GSBB's audit opinion on the Registrant's
financial statements did not contain an adverse opinion or a disclaimer of
opinion, nor was it modified as to audit scope or accounting principles. GSBB's
report was modified to include an explanatory paragraph where they expressed
substantial doubt about the Registrant's ability to continue as a going concern.
There were no disagreements with GSBB during the past two most recent fiscal
years and through the date of their dismissal on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. Additionally, there were no other reportable matters as defined in
Item 304(a)(1)(iv)(B) of Registration S-B, during that period of time.
ITEM 8A: Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of February 28, 2005. This evaluation was carried
out under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2003, our disclosure controls and procedures are effective. There have been no
significant changes in our internal controls over financial reporting during the
quarter ended December 31, 2003 that have materially affected or are reasonably
likely to materially affect such controls.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or
our internal control over financial reporting will necessarily prevent all fraud
and material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can e no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Item 8B: Other Information
None
22
PART III
Item 9: Directors and 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 14, 2005:
Name Age Position
---------------------- ------ ---------------------------------------
Peter H. Pocklington 60 Chairman of the Board
Daniel Wright 48 President, Chief Operating Officer and
Chief Financial Officer
Naoya Kinoshita 40 Director
Donald Berry 47 Director
Michael J Gobuty 60 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 $100 million 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 GolfGear
International, Inc. and Meditron Medical, Inc. (a Canadian Corporation). Mr.
Pocklington is very active in charity work.
Daniel Wright, President, Chief Operating Officer, and Chief Financial Officer
Mr. Wright has been with the Company since May 2001 serving as its
Chief Financial Officer and a director. Mr. Wright has over eleven (11) years in
senior management positions within the golf industry. He began his career in the
golf industry with Tru-Form Golf as their controller. Tru-Form Golf manufactured
clubs and accessories originally severing as 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 its
controller and CFO. GTI manufactured golf grips for both OEMs and retail
outlets. GTI filed for bankruptcy in 1999. In addition to Mr. Wright's golf
industry experience he has worked in the medical and direct market industries
and has several years experience with local accounting firms. Mr. Wright has his
bachelors in accounting and finance.
Naoya Kinoshita
Mr. Kinoshita is President of MC Corporation, which he founded in 1990
and is involved in real estate development and management. In 1995, Mr.
Kinoshita began development, construction and sales of generational housing;
i.e., housing for two generations of family (parents and offspring under one
roof), as well as imported housing sales from outside Japan. During the same
year he started an Internet service provider business. In 1996, Mr. Kinoshita
combined his experience in real estate development and the Internet to construct
and sell the first Internet line pre-installed condominium in Japan. More
recently, he commenced the design, construction, and sales of 2x4 housing which
utilized fewer chemicals, and more natural materials to promote healthy living
for the resident. Mr. Kinoshita has extensive expertise in real estate
development, information processing, sales, management, and distribution. Mr.
Kinoshita has served as a Director since December 2003.
Donald Berry, Director
Mr. Berry is regarded as one of Canada's premier health care sales and
marketing executives. In 1997 as the Vice President of Western Canada for Ingram
and Bell Medical, where he drove the company from number three in market share
to number one in market position. While at Ingram and Bell the Western Division
contributed more then 50% of the company's annual gross profit despite the fact
that Western Canada is less then 30% of the Canadian population. In 2002 Mr.
Berry formed a partnership with Medical Mart Supplies West. As Executive Vice
President and General Manager the Company has grown from negligible sales to
over $7 million in a three year period.
23
Michael J. Gobuty, Director
Mr. Gobuty started with Victoria Leather Garment MFG. Co. Ltd. in 1958.
From an entry level position in the receiving department, he worked
progressively through every job description in the organization to a position of
complete control of the company. One of the largest companies of its kind in
Canada, Victoria Leather manufactured and sold full lines of leather outerwear
and sportswear. Currently Mr. Gobuty is in dual control of Gobuty's & Son's,
where he is responsible for the production and sourcing of manufacturing in main
land China.
Item 10: Executive Compensation
The following table sets forth the cash compensation paid by the
Company to its Chief Executive Officer, who is the only officer who was paid
aggregate compensation exceeding $100,000 for the past three years.
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------------
Annual compensation Long-term compensation
--------------------------------------- ----------------------------------------------------
Awards Payouts
------------------------ ---------
Securities
Restricted Underlying
Other annual Stock options/ LTIP All other
Name and Salary Bonus compensation Award(s) SARs Payouts compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
-------------------- ------- ----------- --------- ------------- ----------- ----------- --------- ------------
Donald A. Anderson 2003 88,468 0 5,933 (2) 0 0 0 0
2002 107,619 0 17,155 (1) 0 5,000,000 0 0
2001 119,790 0 17,155 (1) 0 0 0 0
John Pierandozzi (3) 2003 51,231 0 0 0 0 0 0
2002 0 0 0 0 0 0 0
2001 0 0 0 0 0 0 0
-------------------- ------- ----------- --------- ------------- ----------- ----------- --------- ------------
(1) Includes $5,972 for medical insurance premiums and $2,183 for life
insurance premiums paid on behalf of Mr. Anderson. Also includes auto
allowance of $9,000.
(2) Includes $2,183 for life insurance premiums paid on behalf of Mr. Anderson.
Also includes auto allowance of $3,750.
(3) Mr. Pierandozzi, President, assumed Mr. Anderson's responsibilities on
December 19, 2003, the date of Mr. Anderson's resignation as Chief
Executive Officer. Mr. Pierandozzi resigned on October 14, 2004.
The following table sets forth certain information with respect to options held
by the named officers at December 31, 2003.
Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
------------------------------- -----------------------------
Number of securities underlying Value of unexercised in-the-
unexercised options/SARs at FY money options/SARs at FY-end
end(#) ($)
------------------------------- ----------------------------
Shares
acquired on Value realized
Name exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- -------------- -------------- --------------- ------------ --------------
Donald A. Anderson 0 0 1,733,333 (1) 0 0 0
John Pierandozzi 0 0 0 0 0 0
(1) Effective with Mr. Anderson's resignation on December 19, 2003, 3,666,667
options were cancelled.
24
Item 11: Security Ownership of Certain Beneficial Owners and Management
The following table shows the beneficial ownership of our shares of
common stock as of March 22, 2004 by (i) each person who is known by us to be
the beneficial owner of more than five percent (5%) of our common stock, (ii)
each of our directors and executive officers and (iii) all directors and
executive officers as a group. Except as otherwise indicated, the beneficial
owners listed in the table have sole voting and investment powers of their
shares.
Number of Percentage
Name and Address Shares Owned
------------------------------ ---------- ----------
Mr. Peter H. Pocklington 15,000,000 (1) 45% (2)
Quincy Investment Corp
47-111 Vintage Dr. East #309
Indian Wells, CA 92210
Mr. Naoya Kinoshita 5,800,922 (1) 44% (2)
MC Corporation
Terasiosu Bldg,
6-7-2 Minami Aoama Minato-Ku
Tokyo, Japan 107-0062
(1) The indicated shares represent the number of outstanding securities owned by
the beneficial owner, and does not include the number of securities which would
be held upon conversion of debt or equity instruments.
(2) The indicated percentage includes outstanding securities owned and any
securities that each beneficial owner has the right to acquire upon conversion
of debt or equity securities.
Item 12: Certain Relationships and Related Transactions
On December 30, 2003, GolfGear International, Inc. (the "Company")
completed the sale of $1,000,000 of Convertible Debentures. The Debentures are
automatically converted into Preferred Stock at $1.00 per share within ninety
days of the date of issuance. Holders of the Preferred stock shall have the
right to convert the Preferred stock into shares of Common Stock of the Company
at conversion rates of 158 to 1, and 161 to 1. The Preferred stock are
convertible upon any of the following: eighteen months after the issuance of the
Preferred Stock, a Change in Control or upon the date the Company is no longer
required to file reports or financial statements with the United States
Securities Exchange Commission. If the Company is not able to convert this
Debenture into shares of Preferred within ninety days from the date of issuance
the Debentures shall become immediately due and payable in full, with interest
accruing on the face amount at a rate of 5% per annum. Currently the Debentures
are in default, but the holders have made no demands at this time.
On October 07, 2003 (the "Company") completed the sale of $250,000 of
convertible debentures to related parties. The debentures are convertible into
common stock at $0.09 per share for a period of 3 months for each share of
common stock issued upon conversion of the debentures, 1 common stock purchase
warrant will be issued, which will be exercisable for a period of 12 months at
$0.045 per share. This debenture has been converted into 2,800,922 shares of
common stock in December 2003.
25
Item 13: Exhibits
(a) Exhibits
3.1 Articles of Incorporation (1)
3.2 Certificate of Amendment of Articles of Incorporation (1)
3.3 Certificate of Amendment of Articles of Incorporation (1)
3.4 Articles of Merger (1)
3.5 Bylaws (1)
4.3 Binding Subscription Agreement for Purchase of Equity Securities
(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)
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(6)
10.19 Stock Purchase Agreement dated April 8, 2002(6)
10.20 Promissory Note dated April 8, 2002(6)
10.21 Stock Pledge Agreement dated April 8, 2002(6)
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)
10.27 Non-Exclusive License Agreement (Nike, Inc.) (5)
21 Subsidiaries of the Registrant (1)
31 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002 (7)
32 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002 (7)
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) Previously filed as an Exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002, and incorporated
herein by reference
(5) Previously filed as an Exhibit to the Company's Annual Report on Form
10-QSB for the quarter ended March 31, 2003, and incorporated herein
by reference.
(6) Previously filed as Exhibits to the Company's Report on Form 8-K.
(7) Filed herewith
26
Item 14: Principal Accountant Fees and Services
On October 21, 2003 the Company received notice from its current
auditors, Good, Swartz, Brown and Berns, LLP ("GSBB"), that they will no longer
provide audit services to SEC reporting companies, and are therefore resigning
as the Company's independent auditors.
Effective November 8, 2003 the Board of Directors approved the
engagement of Corbin & Company, LLP ("C&C") as its independent auditors for the
fiscal year ending December 31, 2003. The Company did not consult with C&C prior
to their retention.
During the past two years, GSBB's audit opinion on the Registrant's
financial statements did not contain an adverse opinion or a disclaimer of
opinion, nor was it modified as to audit scope or accounting principles. GSBB's
report was modified to include an explanatory paragraph where they expressed
substantial doubt about the Registrant's ability to continue as a going concern.
There were no disagreements with GSBB during the past two most recent
fiscal years and through the date of their dismissal on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
Audit and Non-Audit Fees
Aggregate fees for professional services rendered to the Company by
Corbin & Company LLP and its predecessor firm GSBB for the years ended December
31, 2003 and 2002 were as follows:
Services Provided 2003 2002
----------------- ------- -------
Audit Fees $43,000 $33,800
Audit Related Fees $ -- $ --
Tax Fees $ -- $ --
All Other Fees $50,605 $15,110
------- -------
Total $93,605 $48,910
======= =======
Audit Fees
The aggregate fees billed for the years ended December 31, 2003 and
2002 were for the audits of our financial statements and reviews of our interim
financial statements included in our annual and quarterly reports.
Audit Related Fees
There were no fees billed for the years ended December 31, 2003 and
2002 for the audit or review of our financial statement that are not reported
under Audit Fees.
Tax Fees
There were no fees billed for the years ended December 31, 2003 and
2002 for professional services related to tax compliance, tax advice and tax
planning.
All Other Fees
The aggregate fees billed for the years ended December 31, 2003 and
2002 were for services other than the services described above. These services
include attendance and preparation for shareholder and audit committee meetings,
consultation on accounting, on internal control matters and review of and
consultation on our registration statements and issuance of related consents
(Forms S-3 and S-8).
27
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: May 20, 2005 /s/ Daniel C. Wright
-------------------------
Daniel C. Wright
President, Chief Operating Officer
and Chief Financial Officer
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: May 20, 2005 /s/ Peter H. Pocklington
------------------------
Peter H. Pocklington
Chairman of the Board
EXHIBIT INDEX
Exhibit 31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
Exhibit 32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.