UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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.
--------------------------------------------------------------------------------
(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 issuer 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 October 31, 2000, the Company had 13,378,848 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 -
September 30, 2000 (Unaudited) and December 31, 1999
Consolidated Statements of Operations
(Unaudited) - Three Months and Nine Months
Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements
(Unaudited) - Three Months and Nine Months
Ended September 30, 2000 and 1999
Management's Discussion and Analysis or Plan
of Operation
Item 2. OTHER INFORMATION
PART II.
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
2000 1999
--------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 41,844 $ 793,262
Accounts receivable, net of
allowance for doubtful
accounts of $90,937 and
$40,000 at September 30, 2000
and December 31, 1999,
respectively 522,463 446,214
Inventories
Component parts 508,499 296,847
Finished goods 478,043 155,425
Prepaid expenses and
other assets 24,977 20,610
--------------- --------------
Total current assets 1,575,826 1,712,358
--------------- --------------
Property and equipment 473,396 381,595
Less accumulated depreciation
and amortization (284,748) (259,549)
--------------- --------------
188,648 122,046
--------------- --------------
Other assets:
Patents and trademarks, net of
accumulated amortization of
$125,574 and $107,114 at
September 30, 2000 and December
31, 1999, respectively 138,044 156,504
Goodwill, net of accumulated
amortization of $14,638 at
September 30, 2000 205,212 -
Deposits and other assets 17,113 23,025
--------------- --------------
360,369 179,529
--------------- --------------
Total assets $ 2,124,843 $ 2,013,933
=============== ==============
(continued)
3
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GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
September 30, December 31,
2000 1999
--------------- --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank credit line payable $ 51,127 $ 16,020
Notes payable to stockholders 22,130 35,434
Notes payable - current portion 34,468 70,631
Accounts payable and accrued
Liabilities 916,475 641,498
Accrued product warranties 82,616 36,000
Accrued interest 11,579 12,448
Accrued officer's compensation 153,250 124,000
--------------- --------------
Total current liabilities 1,271,645 936,031
--------------- --------------
Non-current liabilities:
Note payable 50,000 -
--------------- --------------
Total liabilities 1,321,645 936,031
--------------- --------------
Stockholders' equity:
Preferred stock, $.001 par value;
Authorized - 10,000,000 shares
Series A Senior Convertible
Preferred Stock:
Issued and outstanding -
229,762 shares and 216,626
shares at September 30, 2000 and
December 31, 1999, respectively
(stated value - $9.50 per share) 230 217
Common stock, $.001 par value;
Authorized - 50,000,000 shares
Issued and outstanding -
13,358,848 shares and 12,816,348
shares at September 30, 2000 and
December 31, 1999, respectively 13,359 12,816
Additional paid-in capital 8,279,459 7,981,695
Accumulated deficit (7,489,850) (6,916,826)
--------------- --------------
Total stockholders' equity 803,198 1,077,902
--------------- --------------
Total liabilities and
stockholders' equity $ 2,124,843 $ 2,013,933
=============== ==============
See accompanying notes to consolidated financial statements.
4
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GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended
September 30,
--------------------------
2000 1999
------------ ------------
Sales $ 573,702 $ 509,524
Cost of goods sold 376,264 292,614
------------ ------------
Gross profit 197,438 216,910
Operating expenses:
Selling and marketing 139,825 138,717
Tour and pro contracts 15,369 15,834
Provision for bad debts 7,341 122,778
General and administrative 375,075 283,553
Depreciation and amortization 29,990 10,816
------------ ------------
Total expenses 567,600 571,698
------------ ------------
Net loss from operations (370,162) (354,788)
Other income (expense):
Interest income 447 -
Interest expense (5,274) (17,677)
Loss on disposition of assets (7,439) -
------------ ------------
Net loss ($382,428) ($372,465)
============ ============
Net loss applicable to
common stockholders:
Net loss ($382,428) ($372,465)
Less dividends on Series A
Senior Convertible Preferred Stock (32,431) -
------------ ------------
Net loss applicable to
common stockholders ($414,859) ($372,465)
============ ============
Net loss per common share -
Basic and diluted ($0.03) ($0.03)
============ ============
Weighted average number of
common shares outstanding -
Basic and Diluted 13,225,515 12,587,194
============ ============
See accompanying notes to consolidated financial statements.
5
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GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ ------------
Sales $ 2,633,127 $ 1,872,458
Cost of goods sold 1,383,346 992,348
------------ ------------
Gross profit 1,249,781 880,110
Operating expenses:
Selling and marketing 531,105 408,578
Tour and pro contracts 40,369 165,721
Provision for bad debts 70,170 237,778
General and administrative 1,005,567 808,350
Depreciation and amortization 65,641 32,026
------------ ------------
Total expenses 1,712,852 1,652,453
------------ ------------
Net loss from operations (463,071) (772,343)
Other income (expense):
Interest income 7,518 -
Interest expense (15,362) (37,746)
Loss on disposition of assets (7,439) -
------------ ------------
Net loss ($478,354) ($810,089)
============ ============
Net loss applicable to
common stockholders:
Net loss ($478,354) ($810,089)
Less dividends on Series A
Senior Convertible Preferred Stock
(94,670) -
------------ ------------
Net loss applicable to
common stockholders ($573,024) ($810,089)
============ ============
Net loss per common share -
Basic and diluted ($0.04) ($0.06)
============ ============
Weighted average number of
common shares outstanding -
Basic and Diluted 12,990,515 12,536,249
============ ============
See accompanying notes to consolidated financial statements.
6
<PAGE>
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
----------------------
2000 1999
---------- ----------
Cash flows from operating activities:
Net loss ($478,354) ($810,089)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 65,641 32,025
Provision for bad debts 70,170 237,778
Loss on disposition of assets 7,439 -
Common stock issued for services 46,151 18,970
Fair value of stock options and
warrants issued to non-employees
for services 7,150 246,593
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (146,419) (223,631)
Inventories (534,270) 101,730
Prepaid expenses and other
receivables (4,367) (1,850)
Deposits and other assets 11,412 -
Increase (decrease) in:
Accounts payable and
accrued liabilities 274,977 335,047
Accrued product warranties 21,616 (15,421)
Accrued interest (869) 7,736
Accrued officer's compensation 29,250 -
---------- ----------
Net cash used in operating activities (630,473) (71,112)
---------- ----------
Cash flows from investing activities:
Addition to patents and trademark - (350)
Purchase of property and equipment (106,585) (5,575)
---------- ----------
Net cash used in investing activities (106,585) (5,925)
---------- ----------
(continued)
7
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GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
Nine Months Ended
September 30,
---------------------
2000 1999
---------- ---------
Cash flows from financing activities:
Proceeds from sale of equity
securities, net $ - $ 50,000
Payments on notes payable to
stockholders (13,304) (1,500)
Borrowing from bank credit line 35,107 20,962
Proceeds from short-term borrowings - 50,000
Repayment on short-term borrowings (36,163) (30,903)
---------- ---------
Net cash (used in) provided by
financing activities (14,360) 88,559
---------- ---------
Cash and cash equivalents:
Net (decrease) increase (751,418) 11,522
At beginning of period 793,262 31,771
---------- ---------
At end of period $ 41,844 $ 3,293
========== =========
See accompanying notes to consolidated financial statements.
8
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GolfGear International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months and Nine Months Ended September 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 interim 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 September 30, 2000, the results of operations
for the three months and nine months ended September 30, 2000 and 1999, and the
cash flows for the nine months ended September 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 with respect to interim
financial statements, 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
9
<PAGE>
The results of operations for the three months and nine months ended September
30, 2000 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 2000.
Earnings Per Share - Basic earnings per share is calculated by dividing net loss
applicable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that would occur upon the exercise or conversion of common
equivalent shares. Potentially dilutive securities were anti-dilutive for all
periods presented, and accordingly, basic and diluted earnings per share are the
same for all periods presented. As of September 30, 2000, potentially dilutive
securities consisted of outstanding preferred stock, stock options and warrants
representing 2,297,620 shares, 1,979,905 shares and 3,077,179 shares of common
stock, respectively.
2. Stockholders' Equity
During the nine months ended September 30, 2000, the Company issued 177,500
shares of common stock for services and recognized non-cash compensation of
$46,151. During the three months ended September 30, 2000, the Company did not
issue any common stock for services.
During nine months ended September 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) and Leading Edge, LLC
(see Note 4).
The Company issued 28,500 shares of common stock for services during the nine
months ended September 30, 1999 and recognized non-cash compensation expense of
$18,970. The Company also sold 66,667 shares of common stock for $50,000 during
the nine months ended September 30, 1999.
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 nine
months ended September 30, 2000, the Company recognized $50,250 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 nine months ended September 30, 1999, the Company
recognized $246,593 of such costs, which were charged to operations.
10
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On September 27, 1999, the Company entered into an agreement with M.C.
Corporation of Tokyo, Japan 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. The reset provision contained in the original
agreement expired during the year 2000, one year after the original issuance of
the preferred stock.
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. For
the three months ended September 30, 2000, 3,414 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $32,431.
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 nine months
ended September 30, 2000.
11
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On September 5, 2000, the Company executed a service agreement with Travis
Morgan Securities, Inc. ("Travis Morgan") to engage Travis Morgan as a financial
advisor to the Company, with respect to financial advisory, corporate finance
and merger and acquisition matters for the twelve month period commencing
September 1, 2000. In connection with the agreement, the Company issued
warrants to Travis Morgan to purchase 390,000 shares of common stock at an
exercise price of $0.35 per share and were exercisable for a five year period
commencing on September 5, 2000. The warrants were determined to have a fair
value of $85,800 based on the Black-Scholes pricing model. The fair value of
these warrants was expensed over a twelve month period.
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 Nevada 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
12
<PAGE>
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 $26,650
based on the Black-Scholes option 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.
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 $5,500 based on
the Black-Scholes option 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 nine months ended September 30, 1999, as if the Company had acquired the Bel
Air Golf Companies' product lines effective January 1, 1999.
4. Acquisition of the Leading Edge, LLC's Product Lines
On August 30, 2000 (the "Closing Date"), the Company completed the acquisition
of certain assets of Leading Edge, LLC ("Leading Edge"), which included the
"Leading Edge" trade name. The acquisition consisted primarily of inventory,
trade names, trademarks and other intangible assets. Leading Edge is a
manufacturer of proprietary putters. Leading Edge putters are protected by a
United States design patent. The Company, through its wholly-owned subsidiary,
Leading Edge Acquisition, Inc., a Nevada corporation, is operating the product
lines acquired from Leading Edge as a separate division of the Company, and
will continue to market putters under the name Leading Edge.
13
<PAGE>
In consideration for acquiring the business of Leading Edge, the Company issued
200,000 shares of its common stock and warrants to purchase 150,000 shares of
its common stock exercisable at $1.00 per share for a period of four years from
the Closing Date. The warrants were determined to have a fair value of $18,000
based on the Black-Scholes option pricing model. The fair value of these
warrants was recorded as goodwill and is being amortized over five years.
5. 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 September 30, 2000, sales to customers in the
United States and the Far East were $550,002 (96%) and $23,700 (4%),
respectively. During the nine months ended September 30, 2000, sales to
customers in the United States and the Far East were $2,023,214 (77%) and
$609,913 (23%), respectively.
During the three months ended September 30, 1999, sales to customers in the
United States and the Far East were $345,157 (68%) and $165,066 (32%),
respectively. During the nine months ended September 30, 1999, sales to
customers in the United States and the Far East were $1,400,172 (75%) and
$472,286 (25%), respectively.
During the three months ended September 30, 2000, 2 customers accounted for
approximately 28% (10% and 18%) of total sales, and during the nine months ended
September 30, 2000, 2 customers accounted for approximately 48% (29% and 19%) of
total sales.
During the three months ended September 30, 1999, 2 customers accounted for
approximately 56% (31% and 25%) of total sales, and during the nine months ended
September 30, 1999, 3 customers accounted for approximately 62% (21%, 22% and
19%) of total sales.
14
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6. Legal Proceedings
A claim has been asserted against the Company for breach of contract, as well as
certain other claims, by Peter Alliss, who has asserted damages in excess of
$600,000 arising out of a contract between the parties dated January 1, 1998.
The Company and Mr. Alliss are in discussions regarding the validity of the
claims and the actual amount of damages, if any, as well as a potential
settlement. However, there can be no assurance that a settlement will
ultimately be concluded. The Company believes that the claims are substantially
without merit, and intends to vigorously contest any litigation that may be
filed. As this matter is in an early stage, the Company is currently unable to
predict the ultimate outcome of this matter or the effect, if any, that its
resolution may have on the Company's financial position, results of operations
and cash flow.
15
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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 September
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 September 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.
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 September 30, 2000, sales to customers in the
United States and the Far East were $550,002 (96%) and $23,700 (4%),
respectively. During the nine months ended September 30, 2000, sales to
customers in the United States and the Far East were $2,023,214 (77%) and
$609,913 (23%), respectively.
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<PAGE>
During the three months ended September 30, 1999, sales to customers in the
United States and the Far East were $345,157 (68%) and $165,066 (32%),
respectively. During the nine months ended September 30, 1999, sales to
customers in the United States and the Far East were $1,400,172 (75%) and
$472,286 (25%), respectively.
During the three months ended September 30, 2000, 2 customers accounted for
approximately 28% (10% and 18%) of total sales, and during the nine months ended
September 30, 2000, 2 customers accounted for approximately 48% (29% and 19%) of
total sales.
During the three months ended September 30, 1999, 2 customers accounted for
approximately 56% (31% and 25%) of total sales, and during the nine months ended
September 30, 1999, 3 customers accounted for approximately 62% (21%, 22% and
19%) of total sales.
Acquisition of the New 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 Nevada 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,
17
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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 $26,650 based on the Black-Scholes option pricing model, all of
which was recorded as goodwill.
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 $5,500 based on
the Black-Scholes option 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.
On August 30, 2000 (the "Closing Date"), the Company completed the acquisition
of certain assets of Leading Edge, LLC ("Leading Edge"), which included the
"Leading Edge" trade name. The acquisition consisted primarily of inventory,
trade names, trademarks and other intangible assets. Leading Edge is a
manufacturer of proprietary putters. Leading Edge putters are protected by a
United States design patent. The Company, through its wholly-owned subsidiary,
Leading Edge Acquisition, Inc., a Nevada corporation, is operating the product
lines acquired from Leading Edge as a separate division of the Company, and
will continue to market putters under the name Leading Edge.
In consideration for acquiring the business of Leading Edge, the Company issued
200,000 shares of its common stock and warrants to purchase 150,000 shares of
its common stock exercisable at $1.00 per share for a period of four years from
the Closing Date. The warrants were determined to have a fair value of $18,000
based on the Black-Scholes pricing model. The fair value of these warrants was
recorded as goodwill and is being amortized over five years.
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Results of Operations:
Three Months Ended September 30, 2000 and 1999 -
For the three months ended September 30, 2000, net sales increased by $64,179 or
12.6% to $573,702, as compared to $509,524 for the three months ended September
30, 1999. Approximately 31.7% of sales for the three months ended September 30,
2000 consisted of sales generated by the product lines acquired from the Bel Air
Golf Companies.
For the three months ended September 30, 2000, gross profit decreased to
$197,438, as compared to $216,910 for the three months ended September 30, 1999.
As a percent of net sales, gross margin decreased to 34.4% in 2000 from 42.6% in
1999, primarily as a result of a shift in product mix to lower margin product.
Selling and marketing expenses totaled $139,825 (24.4% of sales), and $138,716
(27.2% of sales) for the three months ended September 30, 2000 and 1999,
respectively.
Tour and pro contracts were $15,369 (2.7% of sales) and $15,834 (3.1% of sales)
for the three months ended September 30, 2000 and 1999, respectively.
For the three months ended September 30, 2000, the provision for bad debts
decreased by $115,438 or 94.0% to $7,341 (1.3% of sales), as compared to
$122,778 (24.1% of sales) for the three months ended September 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 September 30, 2000, general and administrative
expenses increased by $91,522 or 32.3% to $375,075 (65.4% of sales), as compared
to $283,553 (55.7% of sales) for the three months ended September 30, 1999, as a
result of the acquisition of the Bel Air Golf Companies and Leading Edge, and a
general increase in the level of operations.
For the three months ended September 30, 2000, depreciation and amortization
increased by $19,174 or 177.3% to $29,990, as compared to $10,816 for the three
months ended September 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 $375,278 for the three
months ended September 30, 2000, as compared to a net loss of $372,465 for the
three months ended September 30, 1999.
Nine Months Ended September 30, 2000 and 1999 -
For the nine months ended September 30, 2000, net sales increased by $760,669 or
40.6% to $2,633,127, as compared to $1,872,458 for the nine months ended
September 30, 1999. Approximately 26.7% of sales for the nine months ended
September 30, 2000 consisted of sales generated by the product lines acquired
from the Bel Air Golf Companies.
For the nine months ended September 30, 2000, gross profit increased to
$1,249,781, as compared to $880,110 for the nine months ended September 30,
1999. As a percent of net sales, gross margin increased to 47.5% in 2000 from
47.0% in 1999, primarily as a result of increasing sales of recently introduced
higher-margin products.
For the nine months ended September 30, 2000, selling and marketing expenses
increased by $122,527 or 30.0% to $531,105 (20.2% of sales), as compared to
$408,578 (21.8% of sales) for the nine months ended September 30, 1999, as a
result of increased efforts by the Company to promote its products.
For the nine months ended September 30, 2000, tour and pro contracts decreased
by $125,352 or 75.6% to $40,369 (1.5% of sales), as compared to $165,721 (8.9%
of sales) for the nine months ended September 30, 1999, as a result of reduced
emphasis and reliance by the Company on touring professionals to promote the
Company's products.
For the nine months ended September 30, 2000, the provision for bad debts
decreased by $167,609 or 70.5% to $70,170 (2.7% of sales), as compared to
$237,778 (12.7% of sales) for the nine months ended September 30, 1999, as a
result of a dispute with a customer in 1999 that resulted in an uncollectible
accounts receivable.
For the nine months ended September 30 2000, general and administrative expenses
increased by $197,217 or 24.4% to $1,005,567 (38.2% of sales), as compared to
$808,350 (43.2% of sales) for the nine months ended September 30, 1999, as a
result of the acquisition of the Bel Air Golf Companies, the acquisition of
Leading Edge, the relocation in early 2000 to a new office and warehouse
facility, and a general increase in the level of operations.
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For the nine months ended September 30, 2000, depreciation and amortization
increased by $33,614 or 105.0% to $65,641, as compared to $32,026 for the nine
months ended September 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 and Leading Edge.
As a result of the aforementioned factors, net loss was $471,204 for the nine
months ended September 30, 2000, as compared to a net loss of $810,089 for the
nine months ended September 30, 1999.
Liquidity and Capital Resources - September 30, 2000:
Operating Activities. The Company's operations utilized cash of $630,473 during
the nine months ended September 30, 2000, as compared to utilizing cash of
$71,112 during the nine months ended September 30, 1999. The increase in cash
utilized in operating activities in 2000 as compared to 1999 of $559,361 was
primarily a result of an increase in cash utilized for accounts receivables and
inventories. During the nine months ended September 30, 2000, the Company
recognized non-cash expenses related to the issuance of common stock, stock
options and warrants of $53,301, as compared to $265,563 for the nine months
ended September 30, 1999.
At September 30, 2000, cash and cash equivalents had decreased by $751,418, to
$41,844, as compared to $793,262 at December 31, 1999. As a result, the Company
had working capital of $304,181 at September 30, 2000, as compared to working
capital of $776,327 at December 31, 1999, resulting in current ratios of 1.24:1
and 1.83:1 at September 30, 2000 and December 31, 1999, respectively.
At September 30, 2000, accounts receivable had increased by $127,186 or 30.1% to
$613,400, as compared to $486,214 at December 31, 1999, exclusive of an
allowance for doubtful accounts of $90,937 and $40,000 at September 30, 2000 and
December 31, 1999, respectively. At September 30, 2000, inventories had
increased by $534,270 or 118.1% to $986,542, as compared to $452,272 at December
31, 1999. Accounts receivable and inventories increased significantly during
the nine months ended September 30, 2000 to support the increased selling effort
with respect to the Bel Air Golf Companies' product lines and a general increase
in the Company's level of operations, as well as the Company entering the
holiday 2000 selling season.
Investing Activities. During the nine months ended September 30, 2000 and 1999,
net cash used in investing activities for the purchase of property and equipment
was $106,585 and $5,925, respectively, 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. In addition, the Company acquired a second
tour van for approximately $60,000 as an added effort to promote its product.
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Financing Activities. During the nine months ended September 30, 2000 and 1999,
the Company repaid $36,163 and $30,903 of short-term borrowings, respectively.
During the nine months ended September 30, 2000 and 1999, the Company borrowed
$35,107 and $20,962, respectively, under its bank credit line. During the nine
months ended September 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 nine months ended September 30, 2000.
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, as amended, 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
For the three months ended September 30, 2000, 3,414 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $32,431.
On August 30, 2000 (the "Closing Date"), the Company completed the acquisition
of certain assets of Leading Edge, LLC ("Leading Edge"), which included the
"Leading Edge" trade names. The acquisition consisted primarily of inventory,
trade name, trademarks and other intangible assets. Leading Edge putters are
protected by a United States design patent. The Company, through its
wholly-owned subsidiary, Leading Edge Acquisition, Inc., a Nevada corporation,
is operating the product lines acquired from Leading Edge as a separate
division of the Company, and will continue to market putters under the name
Leading Edge.
In consideration for acquiring the business of Leading Edge, the Company issued
200,000 shares of its common stock and warrants to purchase 150,000 shares of
its common stock exercisable at $1.00 per share for a period of four years from
the Closing Date. The warrants were determined to have a fair value of $18,000
based on the Black-Scholes pricing model.
On September 5, 2000, the Company executed a service agreement with Travis
Morgan Securities, Inc. ("Travis Morgan") to engage Travis Morgan as a financial
advisor to the Company, with respect to financial advisory, corporate finance
and merger and acquisition matters for the twelve month period commencing
September 1, 2000. In connection with the agreement, the Company issued
warrants to Travis Morgan to purchase 390,000 shares of common stock at an
exercise price of $0.35 per share and were exercisable for a five year period
commencing on September 5, 2000. The warrants were determined to have a fair
value of $85,800 based on the Black-Scholes pricing model. The fair value of
these warrants was expensed over a twelve month period.
The shares of common stock, preferred stock, 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.
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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 September 30, 2000 -
No Reports on Form 8-K were filed during the three months ended
September 30, 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: November 13, 2000 By: /s/ DONALD A. ANDERSON
------------------------
Donald A. Anderson
President
(Duly Authorized Officer)
Date: November 13, 2000 By: /s/ LAURA L. LI
------------------------
Laura L. Li
Chief Financial Officer
(Principal Financial Officer)
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