UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-28007
GOLFGEAR INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 43-1627555
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12771 Pala Drive, Garden Grove, California 92841
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(Address of principal executive offices)
(714) 899-4274
--------------------------
(Issuer's telephone number)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2000, the Company had 13,158,848 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
<PAGE>
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - June 30,
2000 and December 31, 1999
Consolidated Statements of Operations (Unaudited) - Three Months and
Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended
June 30, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited) - Six Months
Ended June 30, 2000 and 1999
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
<TABLE>
<CAPTION>
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
2000 1999
------------ ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,429 $ 793,262
Accounts receivable, net of
allowance for doubtful
accounts of $97,887 and
$40,000 at June 30, 2000
and December 31, 1999,
respectively 895,154 446,214
Inventories
Component parts 549,826 296,847
Finished goods 270,928 155,425
Prepaid expenses and
other receivables 46,308 20,610
------------ ----------------
Total current assets 1,794,645 1,712,358
------------ ----------------
Property and equipment 477,919 381,595
Less accumulated depreciation
and amortization (280,744) (259,549)
------------ ----------------
197,175 122,046
------------ ----------------
Other assets:
Patents and trademarks, net
of accumulated amortization
of $115,552 and $107,114 at
June 30, 2000 and December
31, 1999, respectively 148,066 156,504
Goodwill, net of accumulated
amortization of $6,017 at
June 30, 2000 129,382
Deposits and other assets 17,030 23,025
------------ ----------------
294,478 179,529
------------ ----------------
Total assets $2,286,298 $2,013,933
============ ================
3
<PAGE>
(continued)
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) (continued)
June 30, December 31,
2000 1999
------------ ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank credit line payable $ 52,841 $ 16,020
Notes payable to stockholders 33,062 35,434
Notes payable 42,468 70,631
Accounts payable and accrued
expenses 786,252 641,498
Accrued product warranties 46,677 36,000
Accrued interest 12,973 12,448
Accrued officer's compensation 143,500 124,000
------------ ----------------
Total current liabilities 1,117,773 936,031
------------ ----------------
Non-current liabilities:
Note payable 50,000
------------ ----------------
Total liabilities 1,167,773
------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.001 par value;
Authorized - 10,000,000 shares
Series A Senior Convertible
Preferred Stock:
Issued and outstanding -
226,348 shares and 216,626 shares
at June 30, 2000 and December 31,
1999, respectively (stated value -
$9.50 per share) 226 217
Common stock, $.001 par value;
Authorized - 50,000,000 shares
Issued and outstanding -
13,158,848 shares and 12,816,348
shares at June 30, 2000 and
December 31, 1999, respectively 13,159 12,816
Additional paid-in capital 8,180,132 7,981,695
Accumulated deficit (7,074,992) (6,916,826)
------------ ----------------
Total stockholders' equity 1,118,525 1,077,902
------------ ----------------
Total liabilities and
stockholders' equity $2,286,298 $2,013,933
============ ================
See accompanying notes to consolidated financial statements.
4
<PAGE>
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30,
--------------------------
2000 1999
------------ ----------------
Sales $ 1,434,980 $ 943,508
Cost of goods sold 713,602 518,654
------------ ----------------
Gross profit 721,378 424,854
------------ ----------------
Expenses:
Selling and marketing 211,256 124,786
Tour and pro contracts 14,769 49,004
Provision for bad debts 47,829 110,000
General and administrative 318,342 223,668
Depreciation and amortization 21,002 10,732
------------ ----------------
Total expenses 613,198 518,190
------------ ----------------
Net income (loss) from operations 108,180 (93,336)
Other income (expense):
Interest income 2,063
Interest expense (6,596) (9,620)
------------ ----------------
Net income (loss) $103,647 ($102,956)
============ ================
Net income (loss) applicable to
common stockholders:
Net income (loss) $ 103,647 ($102,956)
Less dividends on Series A
Senior Convertible
Preferred Stock (31,538)
------------ ----------------
Net income (loss) applicable to
common stockholders $ 72,109 ($102,956)
============ ================
Net income (loss) per common share -
Basic and diluted $ 0.01 ($0.01)
============ ================
Weighted average number of
common shares outstanding -
Basic 12,926,348 12,515,527
============ ================
Diluted 13,337,202 12,515,527
============ ================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Six Months Ended June 30,
---------------------------
2000 1999
------------ ---------------
<S> <C> <C>
Sales $2,059,425 $1,362,235
Cost of goods sold 1,007,082 699,734
------------ ---------------
Gross profit 1,052,343 662,501
------------ ---------------
Expenses:
Selling and marketing 391,281 278,167
Tour and pro contracts 25,000 142,014
Provision for bad debts 62,829 115,000
General and administrative 630,493 525,147
Depreciation and amortization 35,651 21,210
------------ ---------------
Total expenses 1,145,254 1,081,538
------------ ---------------
Net loss from operations (92,911) (419,037)
Other income (expense):
Interest income 7,071
Interest expense (10,088) (20,068)
------------ ---------------
Net loss ($ 95,928) ($ 439,105)
============ ===============
Net loss applicable to common
stockholders:
Net loss ($ 95,928) ($ 439,105)
Less dividends on Series A
Senior Convertible
Preferred Stock (62,239)
------------ ---------------
Net loss applicable to common
stockholders ($ 158,167) ($ 439,105)
============ ===============
Net loss per common share -
Basic and diluted ($ 0.01) ($0.04)
============ ===============
Weighted average number of
common shares outstanding -
Basic and diluted 12,873,015 12,510,777
============ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 95,928) ($439,105)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 35,651 21,210
Provision for bad debts 62,829 115,000
Common stock issued for services 46,150 17,070
Fair value of stock options and
warrants issued to non-employees
for services 216,044
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (511,768) (359,180)
Inventories (368,482) 166,515
Prepaid expenses and other
receivables (25,698) 5,176
Deposits and other assets 10,995
Increase (decrease) in:
Accounts payable and
accrued expenses 144,754 145,484
Accrued product warranties 10,677 (8,417)
Accrued interest 525 2,700
Accrued officer's
compensation 19,500
------------ ---------------
Net cash used in operating
activities (670,795) (117,503)
------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment (96,324) (13,688)
------------ ---------------
Net cash used in investing activities (96,324) (13,688)
------------ ---------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
(continued)
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
Six Months Ended June 30,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of equity
securities, net $ $ 50,000
Decrease in notes payable to
stockholders (2,372) 6,000
Increase in bank credit line 36,821 18,067
Proceeds from short-term borrowings 50,000
Net cash provided by financing
activities 6,286 107,864
------------ ------------
Cash and cash equivalents:
Net decrease (760,833) (23,327)
At beginning of period 793,262 31,771
------------ ------------
At end of period $ 32,429 $ 8,444
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
GolfGear International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2000 and 1999
1. Organization and Basis of Presentation
Basis of Presentation - The accompanying consolidated financial statements
include the operations of GolfGear International, Inc. and its wholly-owned
subsidiaries (the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
Business - The Company designs, develops and markets golf clubs and related golf
products utilizing its proprietary forged face insert technology.
Seasonality - The golf club industry is highly seasonal, with most companies
experiencing up to 60% of their annual sales between February and June, with an
additional 20% of their annual sales occurring between October and December for
the Christmas buying season.
Comments - The accompanying consolidated financial statements are unaudited, but
in the opinion of management of the Company, contain all adjustments, which
include normal recurring adjustments, necessary to present fairly the financial
position at June 30, 2000, the results of operations for the three months and
six months ended June 30, 2000 and 1999, and the cash flows for the six months
ended June 30, 2000 and 1999. The consolidated balance sheet as of December 31,
1999 is derived from the Company's audited financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been presented in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999, as filed with the Securities
and Exchange Commission.
9
<PAGE>
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The results of operations for the three months and six months ended June 30,
2000 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 2000.
Income (Loss) Per Share - Basic earnings per share are calculated by dividing
net income (loss) applicable to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the exercise or conversion of common equivalent shares, if
dilutive. As of June 30, 2000, potentially dilutive securities consisted of
outstanding stock options and warrants to acquire 1,979,905 shares and 2,537,179
shares of common stock, respectively, as well as 2,263,480 shares of common
stock issuable upon the conversion of 226,348 shares of outstanding preferred
stock.
Comprehensive Income - A statement of comprehensive income is not presented as
the Company had no items of comprehensive income for the periods presented.
2. Stockholders' Equity
During the three months and six months ended June 30, 2000, the Company issued
177,500 shares of common stock for services and recognized non-cash compensation
of $46,150.
During the three months and six months ended June 30, 2000, the Company issued
common stock and common stock purchase warrants in conjunction with the
acquisition of the product lines of the Bel Air Golf Companies (see Note 3).
During the six months ended June 30, 1999, the Company issued 23,500 shares of
common stock for services and recognized non-cash compensation expense of
$17,070. The Company also sold 66,667 shares of common stock for $50,000 during
the six months ended June 30, 1999.
10
<PAGE>
The Company accounts for stock options and warrants granted to non-employees in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation", which establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services in exchange for equity instruments. The
Company calculates the fair value of the stock options and warrants issued on
the date of grant using the Black-Scholes option pricing model, and charges the
fair value to operations over the expected period of benefit. During the six
months ended June 30, 2000, the Company recognized $27,700 of such costs, which
were included in goodwill and deferred interest expense in conjunction with the
acquisition of the product lines of the Bel Air Golf Companies (see Note 3).
During the six months ended June 30, 1999, the Company recognized $216,044 of
such costs, which were charged to operations.
On September 27, 1999, the Company entered into an agreement for the sale of
210,526 shares of its Series A Senior Convertible Preferred Stock, for
$2,000,000, which was received by the Company during October 1999. Each share
of Series A Convertible Senior Convertible Preferred Stock is convertible into
10 shares of common stock. Accordingly, the 210,526 shares of Series A Senior
Convertible Preferred Stock are convertible into 2,105,260 shares of the
Company's common stock. The Series A Senior Convertible Preferred Stock votes
on an "as if converted" basis and may be converted in whole or in part for a
period of two years after which it automatically converts into common stock. A
6% annual dividend is payable quarterly in cash or additional shares of
preferred stock at the option of the Company. In conjunction with the preferred
stock financing, the Company also issued warrants to purchase 330,000 shares of
common stock exercisable at $1.00 per share through October 2002.
For the three months ended December 31, 1999, 2,339 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $22,215. For
the three months ended March 31, 2000, 3,232 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $30,701. For
the three months ended June 30, 2000, 3,320 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $31,538.
Anti-dilution provisions permit the preferred stockholder to purchase additional
shares of preferred stock so as to maintain its 14.3% equity interest in the
Company, as defined, for a period of five years. In addition, on a one-time
only basis, as a result of the acquisition of the Bel Air Golf Companies'
product lines (see Note 3), additional preferred shares were required to be
issued to the preferred stockholder for no additional consideration in order to
maintain the preferred stockholder's 14.3% equity interest in the Company, as
defined. Accordingly, during 1999, the Company issued 3,761 additional shares
of Series A Senior Convertible Preferred Stock to the preferred stockholder, and
as a result of the closing of the Bel Air Golf Companies transaction during
April 2000, the Company issued an additional 3,170 shares of Series A Senior
Convertible Preferred Stock to the preferred stockholder during the three months
and six months ended June 30, 2000.
11
<PAGE>
3. Acquisition of the Bel Air Golf Companies' Product Lines
On April 11, 2000 (the "Closing Date"), the Company completed the acquisition of
certain assets of the Bel Air Golf Companies, which included the "Bel Air Golf"
and "Players Golf" trade names. The acquisition consisted primarily of
inventory, trade names, trademarks and other intangible assets. The Bel Air
Golf Companies sold a full line of junior golf clubs under the Players Golf
brand, and Bel Air Golf was known primarily for golf club products and
accessories that offered both value and quality. The Company, through its
wholly-owned subsidiary, Bel Air-Players Group, Inc., a California corporation,
is operating the product lines acquired from the Bel Air Golf Companies as a
separate division of the Company, and will continue to market junior golf clubs
under the name Players Golf and will continue to develop and market other
products under the Players Golf line, the Bel Air Golf line and other trade
names acquired.
In consideration for these assets, the Company assumed a liability of $50,000
(see below) and issued a total of 400,000 shares of its restricted common stock.
The Company also issued warrants to purchase 255,000 shares of common stock
exercisable at $1.00 per share for a period of six months from the Closing Date
and 100,000 common stock purchase warrants exercisable at $1.00 per share for a
period of one year from the Closing Date. In addition, the Company agreed to
issue warrants exercisable for a period of three years from the Closing Date to
purchase 100,000 shares of common stock at $1.00 per share, warrants to purchase
100,000 shares of common stock at $2.00 per share, and warrants to purchase
100,000 shares of common stock at $3.00 per share, vesting only if net revenues
from the product lines acquired from the Bel Air Golf Companies reach
$1,500,000, $2,000,000 and $2,500,000 in 2000, 2001 and 2002, respectively. The
Company also issued 10% of the securities described above as a finder's fee with
respect to this transaction. The fair value of the common stock issued was
$62,700, and the fair value of the vested warrants was determined to be $22,700
based on the Black-Scholes pricing model, all of which was recorded as goodwill.
The Company issued 250,000 of the aforementioned 400,000 shares of common stock
on November 29, 1999 as an advance, in order to be able to operate the Bel Air
Golf Companies' product lines on an interim basis prior to the Closing Date.
The 250,000 shares, as well as the related 25,000 shares issued as a finder's
fee, were valued at $168,934 and charged to inventories.
12
<PAGE>
In connection with the acquisition of the Bel Air Golf Companies' product lines,
the Company assumed a $50,000 liability by issuing a promissory note with
interest at 8% per annum commencing January 1, 2000, with quarterly interest
payments of $1,000 through March 31, 2003, at which time all principal and
unpaid accrued interest is due and payable. The $50,000 face value of this
promissory note was recorded as goodwill. The Company also issued warrants to
purchase 25,000 shares of common stock exercisable at $1.50 per share through
March 31, 2003, which were determined to have a fair value of $5,000 based on
the Black-Scholes pricing model. The fair value of these warrants was recorded
as deferred interest expense, and is being amortized over the period through
March 31, 2003.
Due to the condition of the financial records of the Bel Air Golf Companies, it
is impracticable to present pro forma results of operations for the three months
and six months ended June 30, 1999, as if the Company had acquired the Bel Air
Golf Companies' product lines effective January 1, 1999.
4. Segment and Geographic Information; Major Customers
The Company operates in one business segment. The Company sells primarily to
customers in the United States and the Far East.
During the three months ended June 30, 2000, sales to customers in the United
States and the Far East were $963,331 (67%) and $471,649 (33%), respectively.
During the six months ended June 30, 2000, sales to customers in the United
States and the Far East were $1,473,212 (72%) and $586,213 (28%), respectively.
During the three months ended June 30, 1999, sales to customers in the United
States and the Far East were $872,588 (92%) and $70,920 (8%), respectively.
During the six months ended June 30, 1999, sales to customers in the United
States and the Far East were $1,055,015 (77%) and $307,220 (23%), respectively.
During the three months ended June 30, 2000, three customers accounted for
approximately 53% of total sales, and during the six months ended June 30, 2000,
four customers accounted for approximately 62% of total sales.
During the three months ended June 30, 1999, two customers accounted for
approximately 64% of total sales, and during the six months ended June 30, 1999,
three customers accounted for approximately 66% of total sales.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2000 contains "forward-looking" statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding its working capital requirements, gross margin,
results of operations, business, growth prospects, competition and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements included in this Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 2000 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 golf clubs and related golf products.
The Company utilizes its proprietary forged face insert technology to offer a
full line of golf equipment and accessories. 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.
14
<PAGE>
The Company operates in one business segment. The Company sells primarily to
customers in the United States and the Far East.
The golf club industry is highly seasonal, with most companies experiencing up
to 60% of their annual sales between February and June, with an additional 20%
of their annual sales occurring between October and December for the Christmas
buying season.
During the three months ended June 30, 2000, sales to customers in the United
States and the Far East were $963,331 (67%) and $471,649 (33%), respectively.
During the six months ended June 30, 2000, sales to customers in the United
States and the Far East were $1,473,212 (72%) and $586,213 (28%), respectively.
During the three months ended June 30, 1999, sales to customers in the United
States and the Far East were $872,588 (92%) and $70,920 (8%), respectively.
During the six months ended June 30, 1999, sales to customers in the United
States and the Far East were $1,055,015 (77%) and $307,220 (23%), respectively.
During the three months ended June 30, 2000, three customers accounted for
approximately 53% of total sales, and during the six months ended June 30, 2000,
four customers accounted for approximately 62% of total sales.
During the three months ended June 30, 1999, two customers accounted for
approximately 64% of total sales, and during the six months ended June 30, 1999,
three customers accounted for approximately 66% of total sales.
Acquisition of the Bel-Air Golf Companies' Product Lines:
On April 11, 2000, the Company completed the acquisition of certain assets of
the Bel Air Golf Companies, which included the "Bel Air Golf" and "Players Golf"
trade names. The acquisition consisted primarily of inventory, trade names,
trademarks and other intangible assets. The Bel Air Golf Companies offered a
full line of junior golf clubs under the Players Golf brand, and Bel Air Golf
was known primarily for golf club products and accessories that offer both value
and quality. The Company, through its wholly-owned subsidiary, Bel Air-Players
Group, Inc., a California corporation, is operating the product lines acquired
from the Bel Air Golf Companies as a separate division of the Company, and will
continue to market junior golf clubs under the name Players Golf and will
continue to develop and market other products under the Players Golf line, the
Bel Air Golf line and other trade names acquired.
In consideration for these assets, the Company assumed a liability of $50,000
(see below) and issued a total of 400,000 shares of its restricted common stock.
The Company issued warrants to purchase 255,000 shares of common stock
exercisable at $1.00 per share for a period of six months from the Closing Date
and warrants to purchase 100,000 shares of common stock exercisable at $1.00 per
share for a period of one year from the Closing Date. In addition, the Company
agreed to issue warrants exercisable for a period of three years from the
Closing Date to purchase 100,000 shares of common stock at $1.00 per share,
warrants to purchase 100,000 shares of common stock at $2.00 per share, and
warrants to purchase 100,000 shares of common stock at $3.00 per share, vesting
only if net revenues from the product lines acquired from the Bel Air Golf
Companies reach $1,500,000, $2,000,000 and $2,500,000 in 2000, 2001 and 2002,
respectively. The Company also issued 10% of the securities described above as
a finder's fee with respect to this transaction. The fair market value of the
common stock issued was $62,700, and the fair value of the vested warrants was
determined to be $22,700 based on the Black-Scholes pricing model, all of which
was recorded as goodwill.
15
<PAGE>
The Company issued 250,000 of the 400,000 shares of common stock on November 29,
1999 as an advance, in order to be able to operate the Bel Air Golf Companies'
product lines on an interim basis prior to the Closing Date. The 250,000
shares, as well as the related 25,000 shares issued as a finder's fee, were
valued at $168,934 and charged to inventories.
In connection with the acquisition of the Bel Air Golf Companies' product lines,
the Company assumed a $50,000 liability by issuing a promissory note with
interest at 8% per annum commencing January 1, 2000, with quarterly interest
payments of $1,000 through March 31, 2003, at which time all principal and
unpaid accrued interest is due and payable. The $50,000 face value of this
promissory note was recorded as goodwill. The Company also issued warrants to
purchase 25,000 shares of common stock exercisable at $1.50 per share through
March 31, 2003, which were determined to have a fair value of $5,000 based on
the Black-Scholes pricing model. The fair value of these warrants was recorded
as deferred interest expense, and is being amortized over the period through
March 31, 2003.
Results of Operations:
Three Months Ended June 30, 2000 and 1999 -
For the three months ended June 30, 2000, net sales increased by $491,472 or
52.1% to $1,434,980, as compared to $943,508 for the three months ended June 30,
1999, as a result of increased unit sales and increasing market acceptance of
the Company's proprietary forged face insert technology products. Approximately
27% of sales for the three months ended June 30, 2000 consisted of sales
generated by the product lines acquired from the Bel Air Golf Companies.
16
<PAGE>
For the three months ended June 30, 2000, gross profit increased to $721,378, as
compared to $424,854 for the three months ended June 30, 1999. As a percent of
net sales, gross margin increased to 50.3% in 2000 from 45.0% in 1999, primarily
as a result of increasing sales of recently introduced higher-margin products.
For the three months ended June 30, 2000, selling and marketing expenses
increased by $86,470 or 69.3% to $211,256 (14.7% of sales), as compared to
$124,786 (13.2% of sales) for the three months ended June 30, 1999, as a result
of increased efforts by the Company to promote its products.
For the three months ended June 30, 2000, tour and pro contracts decreased by
$34,235 or 69.9% to $14,769 (1.0% of sales), as compared to $49,004 (5.2% of
sales) for the three months ended June 30, 1999, as a result of reduced emphasis
and reliance by the Company on touring professionals to promote the Company's
products.
For the three months ended June 30, 2000, the provision for bad debts decreased
by $62,171 or 56.6% to $47,829 (3.3% of sales), as compared to $110,000 (11.7%
of sales) for the three months ended June 30, 1999, as a result of a dispute
with a customer in 1999 that resulted in an uncollectible accounts receivable.
For the three months ended June 30, 2000, general and administrative expenses
increased by $94,674 or 42.3% to $318,342 (22.2% of sales), as compared to
$223,668 (23.7% of sales) for the three months ended June 30, 1999, as a result
of the acquisition of the Bel Air Golf Companies, the relocation in early 2000
to a new office and warehouse facility, and a general increase in the level of
operations.
For the three months ended June 30, 2000, depreciation and amortization
increased by $10,270 or 95.7% to $21,002, as compared to $10,732 for the three
months ended June 30, 1999, primarily as a result of fixed assets acquired
during 2000 in conjunction with the relocation to a new office and warehouse
facility in early 2000, and the amortization of goodwill related to the
acquisition of the Bel Air Golf Companies.
As a result of the aforementioned factors, net income was $103,647 for the three
months ended June 30, 2000, as compared to a net loss of $102,956 for the three
months ended June 30, 1999.
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Six Months Ended June 30, 2000 and 1999 -
For the six months ended June 30, 2000, net sales increased by $697,190 or 51.2%
to $2,059,425, as compared to $1,362,235 for the six months ended June 30, 1999,
as a result of increased unit sales and increasing market acceptance of the
Company's proprietary forged face insert technology products. Approximately 25%
of sales for the six months ended June 30, 2000 consisted of sales generated by
the product lines acquired from the Bel Air Golf Companies.
For the six months ended June 30, 2000, gross profit increased to $1,052,343, as
compared to $662,501 for the six months ended June 30, 1999. As a percent of
net sales, gross margin increased to 51.1% in 2000 from 48.6% in 1999, primarily
as a result of increasing sales of recently introduced higher-margin products.
For the six months ended June 30, 2000, selling and marketing expenses increased
by $113,114 or 40.7% to $391,281 (19.0% of sales), as compared to $278,167
(20.4% of sales) for the six months ended June 30, 1999. Despite decreasing as
a percent of sales, selling and marketing expenses increased in 2000 as compared
to 1999 on an absolute basis due to increased efforts by the Company to promote
its products.
For the six months ended June 30, 2000, tour and pro contracts decreased by
$117,014 or 82.4% to $25,000 (1.2% of sales), as compared to $142,014 (10.4% of
sales) for the six months ended June 30, 1999, as a result of reduced emphasis
and reliance by the Company on touring professionals to promote the Company's
products.
For the six months ended June 30, 2000, the provision for bad debts decreased by
$52,171 or 45.4% to $62,829 (3.1% of sales), as compared to $115,000 (8.4% of
sales) for the six months ended June 30, 1999, as a result of a dispute with a
customer in 1999 that resulted in an uncollectible accounts receivable.
For the six months ended June 30 2000, general and administrative expenses
increased by $105,346 or 20.1% to $630,493 (30.6% of sales), as compared to
$525,147 (38.6% of sales) for the six months ended June 30, 1999. Despite
decreasing as a percentage of sales, general and administrative expenses
increased in 2000 as compared to 1999 on an absolute basis as a result of the
acquisition of the Bel Air Golf Companies, the relocation in early 2000 to a new
office and warehouse facility, and a general increase in the level of
operations.
For the six months ended June 30, 2000, depreciation and amortization increased
by $14,441 or 68.1% to $35,651, as compared to $21,210 for the six months ended
June 30, 1999, primarily as a result of fixed assets acquired during 2000 in
conjunction with the relocation to a new office and warehouse facility in early
2000, and the amortization of goodwill related to the acquisition of the Bel Air
Golf Companies.
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As a result of the aforementioned factors, net loss was $95,928 for the six
months ended June 30, 2000, as compared to a net loss of $439,105 for the six
months ended June 30, 1999.
Liquidity and Capital Resources - June 30, 2000:
Operating Activities. The Company's operations utilized cash of $670,795 during
the six months ended June 30, 2000, as compared to utilizing cash of $117,503
during the six months ended June 30, 1999. The increase in cash utilized in
operating activities in 2000 as compared to 1999 of $553,292 was primarily a
result of an increase in cash utilized for accounts receivables and inventories.
During the six months ended June 30, 2000, the Company recognized non-cash
expenses related to the issuance of common stock, stock options and warrants of
$46,150, as compared to $233,114 for the six months ended June 30, 1999.
At June 30, 2000, cash and cash equivalents had decreased by $760,833, to
$32,429, as compared to $793,262 at December 31, 1999. As a result, the Company
had working capital of $676,872 at June 30, 2000, as compared to working capital
of $776,327 at December 31, 1999, resulting in current ratios of 1.61:1 and
1.83:1 at June 30, 2000 and December 31, 1999, respectively.
At June 30, 2000, accounts receivable had increased by $506,827 or 104.2% to
$993,041, as compared to $486,214 at December 31, 1999, exclusive of an
allowance for doubtful accounts of $97,887 and $40,000 at June 30, 2000 and
December 31, 1999, respectively. At June 30, 2000, inventories had increased by
$368,482 or 81.5% to $820,754, as compared to $452,272 at December 31, 1999.
Accounts receivable and inventories increased significantly during the six
months ended June 30, 2000 as a result of the acquisition of the Bel Air Golf
Companies' product lines and a general increase in the Company's level of
operations, as well as the Company entering its peak selling season.
Investing Activities. During the six months ended June 30, 2000 and 1999, net
cash used in investing activities for the purchase of property and equipment was
$96,324 and $13,688, respectively.
Financing Activities. During the six months ended June 30, 2000 and 1999, the
Company repaid $28,163 and $16,203 of short-term borrowings, respectively.
During the six months ended June 30, 2000 and 1999, the Company borrowed $36,821
and $18,067, respectively, under its bank credit line. During the six months
ended June 30, 1999, the Company generated $50,000 from short-term borrowings
and $50,000 from the sale of common stock. The Company did not generate any
proceeds from short-term borrowings or the sale of common stock during the six
months ended June 30, 2000.
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The Company has incurred operating losses and negative cash flows from
operations during the past few years, and has relied on the sale of its
securities to fund its operations since 1997. The Company believes that the
anticipated cash flows from operations, combined with the net proceeds from the
recent sale of the Company's preferred stock, will be adequate to fund
operations for 2000. However, to the extent that the Company experiences a
substantial increase in revenues and/or acquires other golf operations or
companies, the Company may seek additional debt or equity financing. Should the
cash flows generated by operating and financing activities be insufficient to
fund the Company's future operations, the Company believes that it will be able
to adjust its expenditures and/or reduce its operations, as it has in previous
years, to a level consistent with its available working capital resources.
New Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
which is effective for financial statements for all fiscal quarters of all
fiscal years beginning after June 15, 2000. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 also addresses the accounting for hedging
activities. The Company will adopt SFAS No. 133 for its fiscal year beginning
January 1, 2001. The Company does not expect that adoption of SFAS No. 133 will
have a material impact on its financial statement presentation or disclosures.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent sales of unregistered securities
During the three months ended June 30, 2000, the Company issued 177,500 shares
of common stock for services and recognized non-cash compensation of $46,150.
The Company acquired certain assets of the Bel Air Golf Companies during April
2000. In consideration for these assets, the Company assumed a liability of
$50,000 (see below) and issued a total of 400,000 shares of its restricted
common stock. The Company also issued warrants to purchase 255,000 shares of
common stock exercisable at $1.00 per share for a period of six months from the
Closing Date and warrants to purchase 100,000 shares of common stock exercisable
at $1.00 per share for a period of one year from the Closing Date. In addition,
the Company agreed to issue warrants exercisable for a period of three years
from the Closing Date to purchase 100,000 shares of common stock at $1.00 per
share, warrants to purchase 100,000 shares of common stock at $2.00 per share,
and warrants to purchase 100,000 shares of common stock at $3.00 per share,
vesting only if net revenues from the product lines acquired from the Bel Air
Golf Companies reach $1,500,000, $2,000,000 and $2,500,000 in 2000, 2001 and
2002, respectively. The Company also issued 10% of the securities described
above as a finder's fee with respect to this transaction. The fair value of the
common stock issued was $62,700, and the fair value of the vested warrants was
determined to be $22,700 based on the Black-Scholes pricing model, all of which
was recorded as goodwill.
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The Company issued 250,000 of the aforementioned 400,000 shares of common stock
on November 29, 1999 as an advance, in order to be able to operate the Bel Air
Golf Companies' product lines on an interim basis prior to the Closing Date.
The 250,000 shares, as well as the related 25,000 shares issued as a finder's
fee, were valued at $168,934 and charged to inventories.
In connection with the acquisition of the Bel Air Golf Companies' product lines,
the Company assumed a $50,000 liability by issuing a promissory note with
interest at 8% per annum commencing January 1, 2000, with quarterly interest
payments of $1,000 through March 31, 2003, at which time all principal and
unpaid accrued interest is due and payable. The $50,000 face value of this
promissory note was recorded as goodwill. The Company also issued warrants to
purchase 25,000 shares of common stock exercisable at $1.50 per share through
March 31, 2003, which were determined to have a fair value of $5,000 based on
the Black-Scholes pricing model. The fair value of these warrants was recorded
as deferred interest expense, and is being amortized over the period through
March 31, 2003.
As a result of the closing of the Bel Air Golf Companies transaction during
April 2000, the Company issued an additional 3,170 shares of Series A Senior
Convertible Preferred Stock to the preferred stockholder pursuant to certain
anti-dilution provisions during the three months and six months ended June 30,
2000.
For the three months ended June 30, 2000, 3,320 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $31,538.
The shares of common stock, preferred stock, stock options and warrants were
issued based on an exemption from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, based on the representations of the
recipients.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
Three Months Ended June 30, 2000 -
A Current Report on Form 8-K dated April 11, 2000 was filed on April 25,
2000 to report the acquisition of the product lines of the Bel
Air Golf Companies, and was subsequently amended on June 6, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GOLFGEAR INTERNATIONAL, INC.
----------------------------
(Registrant)
Date: August 10, 2000 By: /s/ DONALD A. ANDERSON
-------------------------
Donald A. Anderson
President
(Duly Authorized Officer)
Date: August 10, 2000 By: /s/ ROBERT N. WEINGARTEN
-------------------------
Robert N. Weingarten
Chief Financial Officer
(Principal Financial Officer)
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