UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number: 000-28007
GOLFGEAR INTERNATIONAL, INC.
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(Exact name of small business issuer in its charter)
NEVADA 43-1627555
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
12771 Pala Drive, Garden Grove, California 92841
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(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (714)899-4274
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 1999 were
$2,302,407.
The aggregate market value of the issuer's common stock held by
non-affiliates of the Company as of March 31, 2000, was $3,321,776.
As of March 31, 2000, the issuer had 12,816,348 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
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This Annual Report on Form 10-KSB contains forward-looking statements
relating to future events or the future events or the future financial
performance of the Company, including, but not limited to, statements contained
in "Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Readers are cautioned that such statements, which
may be identified by words including "anticipates," "believes," "intends,"
"estimates," "expects," and similar expressions, are only predictions or
estimations and are subject to known and unknown risks and uncertainties. In
evaluating such statements, readers should consider the various factors
identified in this Annual Report on Form 10-KSB, which could cause actual
events, performance or results to differ materially from those indicated by such
statements.
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
Organization of Business
GolfGear International, Inc., a Nevada corporation (the "Company"),
formerly Harry Hurst Jr., Inc. ("HHI"), was incorporated under the laws of the
State of Nevada on October 9, 1997. The Company is the successor entity
resulting from a November 20, 1997 reorganization between GolfGear
International, Inc. ("GGI"), which, through its predecessors, has been active in
the golf business since 1990, and HHI, a non-operating public corporation. By
the filing of an Amendment to the Articles of Incorporation filed on December 1,
1997, HHI changed its name to GolfGear International, Inc. and GGI changed its
name to GGI, Inc. and remains a wholly-owned subsidiary of the Company. Each
share of common stock of GGI was exchanged for 3.5235 shares of common stock of
HHI. The shareholders of GGI, constituting 90% of the then outstanding shares
of common stock, became the controlling shareholders of the Company.
The Company's executive offices are located at 12771 Pala Drive, Garden
Grove, California 92841, and its telephone number is (714) 899-4274. The
Company's fiscal year ends on December 31. Currently, the Company has seven
full-time employees (four in administration and three in support services) and
six independent sales representatives. None of the Company's employees is
subject to a collective bargaining agreement.
Company Overview
The Company designs, develops and markets innovative premium golf clubs
intended to improve the quality and performance of a golfer's game. Utilizing
patented forged face insert technology, the Company has created the next
generation of metal woods, rendering most other metal woods obsolete in the
process. The concept of producing a golf head with a forged metal face insert
fixed to the body of an investment cast shell (head) is the invention that
brought about a significant change to the approach of making a metal or iron
head. The ability to affix a forged alloy, in the form of a face plate to a
cast main body to the Company's knowledge had never been marketed before.
The Company believes that its forged face metal wood combines the accuracy
and forgiveness of the investment cast metal wood with the feeling, strength and
power that can only come from forged metal. The Company has also applied this
same technology to re-invent the iron, creating a state-of-the-art forged face
iron that features the same forged face metal insert bonded to a cavity-back,
investment-cast club head. This technology produces clubs that have a solid
sweet spot which produces maximum energy transfer providing consistent distance
and accuracy, even if miss-hit.
The Company has developed and sells a full line of patented metal woods and
irons marketed under the name "Ti-Gear", which were first introduced in 1997.
The Company offers both mid-size and over-size models. In January 2000, the
Company began production of the next generation of forged face woods and irons.
The Company will attempt to utilize its patented technology and combine it with
a media campaign in an attempt to enjoy some of the success that companies such
as Orlimar Golf Company and Adams Golf Co. have recently experienced.
All of the Company's products are intended to offer retailers a substantial
profit margin, unlike many of the competitive golf products currently offered
for sale at off-course retailers and discounters. Several of the major
companies in the golf hardware industry have moved to capture market share by
sacrificing their retailers' margins. These companies are selling through
discounters and warehouse stores. This offers a substantial area of opportunity
to the Company, since its proprietary products can provide better margins to
retailers.
The Company's objective is to become a leading manufacturer of forged
insert technology for drivers, irons, wedges and putters. To achieve this
objective, the Company is focusing its market strategy on enhancing the
reputation of its products, increasing its market penetration of its products
and continuing the development of innovative clubs and the refinement and
improvement of existing technology. An integral part of this strategy is the
expansion of the Company's marketing and advertising efforts to target both
domestic and international sales. The Company's domestic marketing strategy is
to create product awareness through infomercials, print advertising, television
commercials and other promotional activities such as on-course golf pro shop
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demonstrations. An important feature of the Company's overall marketing
strategy is the endorsement of its products by touring professional golfers who
will demonstrate the effectiveness of the forged face technology and provide
valuable exposure. The Company also intends to expand its line of clubs by
developing, acquiring or licensing its technologies to other golf manufacturers.
Industry Background
There are approximately 26 million golfers in the United States today, with
approximately 5.4 million of those being avid golfers (playing 25 or more rounds
per year). The sport is popular with both men and women. Its popularity is
gaining around the world. It is one of the few sports in which players spend
more money as they get older. Golf equipment and related merchandise account
for approximately $5 billion in annual sales.
A 1995 institutional research report by the investment banking firm of
Hambrecht & Quist noted that the U.S. golf equipment market is continuing to
grow. Three factors are fueling sales: the increasing popularity of
premium-priced oversized irons, recently introduced innovations in metal woods,
and continuing interest in the sport among new players.
The industry comprises several types of golfers - avid, medium, new and
casual. Avid golfers play frequently and spend significantly larger amounts for
brand name equipment. Medium golfers play more frequently, are less brand
conscious and play with either graphite or steel shafted clubs. Casual golfers
play several games a month and represent the largest group with the potential
upward movement from one category to another. New golfers as beginners
typically use lower cost steel shafted clubs, with a smaller number using
graphite shafted clubs.
Market leaders follow a similar pattern. Each established a market niche.
Callaway introduced the oversize metal wood to the market. Cobra set the stage
for oversize perimeter weighted irons. Each incorporates brand identity,
product innovation and tour validation, from the PGA Tour to the LPGA Tour to
the Senior Tour.
The Company's niche in the global market is the forged face metal insert. Over
the past several years, clubs have become larger, longer and lighter. Inserts
offer a more dense sweet-spot, superior weight distribution and cutting-edge
technology. All-titanium drivers are becoming common because of the move to the
larger size heads. However, there is a cost factor involved in this transition.
Fairway woods do not need to be made completely of titanium. A stainless steel
shell can be used with a forged titanium insert, making these woods more
affordable. The customer can purchase a competitively priced GolfGear fairway
wood, and it can be purchased for 25% less than all-titanium woods.
Because management has first-hand experience working with touring
professionals, the Company believes it will be able to obtain product exposure
from the various tours and anticipates major touring professional exposure.
In the later half of the 1998 season, it appeared to management that market
leaders were beginning to weaken. Some of the market leaders were dependent
upon the Asian markets, which experienced a significant downturn during the past
five years and which dramatically impacted retail golf sales. The Asian markets
are beginning to recover at this time. The Company sees opportunity in these
markets as they have become heavily saturated with product from the major brands
over the last five years. The Company is preparing to move into these markets,
and gradually add a fresh new brand with a story of technology, and not just
marketing.
In the United States market, there are evident signs of transition taking
place as the so-called "Big Boxes" or discounters take on name brand goods at
very attractive prices. Competition will be intense at this level until this
inventory glut is absorbed into the market place. This cycle is still
proceeding and may continue until 2001. On the other hand, the consumer is now
ready for something new. Most of the sets sold by the major club manufacturers
in the last ten years are now aging and there is a substantial replacement
market developing. Even the average golfer needs to upgrade and replace certain
clubs on a regular basis. This is what has been observed by management over the
past few years. Some competitors have experienced tremendous growth throughout
the 1990's, and it only makes sense that a replacement cycle is due in the
market (as has occurred many times in the past). The Company believes that it
has the opportunity to be a major candidate to fit into the void that is
building among both the average and affluent golfers. The Company's brand name
remains underdeveloped while other brands have begun to erode as a result of
having sold their popular models "down market."
Competition
Spalding, MacGregor, and Hogan are well-recognized old-line names in golf
equipment. Names currently dominating the industry's premium-brand sector are
Callaway, Cobra, Taylor Made, Ping and Tommy Armour. Obsolete are the old-line
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companies of the 1960s and 1970s, which the Company believes today offer
lackluster equipment using other sports to promote their names in golf. Today,
companies such as Callaway, Karsten Manufacturing (Ping) and American Brands
(Cobra) are leading a wave of golf-focused idealism among consumers. The
dominating golf companies are innovative, having created new equipment
categories or having already established a market leadership position in a
particular category, such as oversized metal woods or irons.
The Company competes in the premium-priced technology based segment of the
golf club manufacturing industry. This market for golf clubs is highly
competitive, with a number of these established companies competing in this
market, many of which have greater financial and other resources. The Company
believes that its technology, product quality standards, and competitive pricing
structure can provide a competitive edge in the market.
Business Strategy
The Company competes in the premium quality segment of the golf club
industry, a growing and highly competitive area. At the present time, the
Company is sub-contracting its golf club assembly. This enables management to
concentrate on sales and marketing efforts while keeping overhead costs low.
The Company recently leased an 11,000 square foot facility located in
Garden Grove, California,which provides the Company with expanded sales offices,
customer service operations, the capability to conduct telemarketing operations,
as well as space for assembly, finished goods inventory, product staging and
shipping. The Company continues to sub-contract some of its assembly
operations.
Overall Marketing Strategy
The Company intends to concentrate its marketing efforts in television
infomercials and direct marketing techniques which has evolved in recent years
as a successful medium for marketing golf products.
Today, there is much greater direct access to the golf consumer. In the
not too distant past, if a company wanted to sell golf clubs, its salesmen
visited on-course pro shops to make the sale. These shops are limited in the
number of clubs they can stock and in the funds available to purchase stock.
The growth of the off-course golf shops changed the way golf clubs are sold and
advertised. It is now standard industry practice to sell via direct advertising
as well as to the on- and off-course shops.
The Company initially focused its sales efforts on advertising in trade
publications to reach the on- and off-course shop buyers, then advertised in the
consumer publications such as Golf Digest, Golf World, Golf Tips, PGA Magazine
and GolfWeek. Its distributors advertised overseas in similar publications.
The Company expends a substantial amount of effort selling clubs in foreign
markets with the objective to have 50% of sales from foreign markets.
The golf club industry is highly seasonal, with most companies experiencing
up to 60% of sales between February and June with an additional 20% of sales
occurring between October and December for the Christmas buying season. The
majority of the Company's products are introduced in January at the Florida PGA
Show, in September at the Las Vegas International PGA Show, and in February at
the Japan Golf Fair.
The Company attends nearly every major industry trade show. The Company's
management has given numerous trade industry press conferences around the world,
maintaining a high profile and high degree of respect in the industry press. The
Company will also be attending more consumer-oriented shows to extend more brand
awareness. These shows have become very popular on a nationwide basis, and can
be a key element is broadening distribution in these markets.
The Company is becoming increasingly active at key demo days. Most
companies have used some sort of demo program to gain exposure at golf courses
and private country clubs. In 2000, the Company will expand its demo campaign
not only in key United States markets but internationally as well. Subject to
financing, the Company intends to launch one or more tour vans that will be
scheduled across the country, focusing on the most prestigious facilities. The
Company is technology driven and the consumer has shown a desire for more
technical information at recent demo events. The Company has performed
extremely well when in direct competition with the biggest competitors in the
business. At several events in 1998 and 1999, the Company outsold the
competition. The demo programs are intended to supplement the infomercial
program, as well as the print media campaign.
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The Company depends on four major customers for approximately 50% of its
sales. The Company recently entered into a Distribution Agreement with M.C.
Corporation of Tokyo, Japan, which is expected to broaden its customer base.
The Company expects to continue, given its product technology and marketing
approach, to increase sales in existing markets and distribution into additional
geographic regions.
Product and Name Endorsement
The Company utilizes golf professionals to represent the entire line of the
Company's golf products. The Company currently employs Gerry James. Gerry
James is a PGA professional and is one of the longest ball hitters in the world
(he currently has pending in the Guinness Book of World Records a 473 yard
drive). Mr. James appears on behalf of the Company at PGA events, exhibitions,
and numerous long drive events around the world.
Infomercials and Other Marketing
The value of infomercials lies in the creation of millions of interested,
informed and qualified prospects wanting to buy featured products in stores. In
addition to selling products from television, infomercials can be an excellent
source of leads for telemarketing, for promoting a brand's image and "pushing"
the retail store activity. In conjunction with a production company named
"Script to Screen, Inc.", the Company finished its first infomercial in May
1998. The Company is reviewing the possibility of revamping it, based on the
availability of funds. Because of a lack of funds, this infomercial was not
widely run. The Company is considering a second infomercial of perhaps a
shorter format to be produced in 2000, again based on available funds.
An infomercial is typically a 30-minute program that is used to introduce,
market and sell a product at the same time. The infomercial has been a popular
way to save years of conventional marketing and selling methods, and is a faster
and more efficient way to provide the consumer with technical information that
may lead to a purchase. An infomercial campaign is also supported by
conventional selling methods.
The Company has a sales force consisting of 6 independent sales
representatives, which enables them to sell other non-competing lines such as
shoes or clothing. In some areas the Company will have sub reps that will
assist the sales force with demo days and seminars. Management is very active
in the field as well. Management works weekends at demo days in order to get
feedback from the consumer. This feedback is important and provides direct
input that is incorporated at sales meetings and seminars. The Company intends
to support the infomercial with 60 second spots that enhance the Company's
exposure. The Company will also run a print media campaign in the Wall Street
Journal and USA Today, and leading golfing publications.
International Business
The Company has shipped golf clubs all over the world. The Company is
currently not dependent upon selling to the European or Asian markets. However,
it is the Company's objective to have from 35% to 50% of revenue be generated in
foreign markets. This strategy provides a broader market opportunity and can
help offset the effects of regional recessions and market trends. The Company's
clubs will be sold through distributors in most countries, but in some cases the
Company will sell direct to retailers.
On September 28, 1999, the Company announced completion of a Distribution
Agreement encompassing all of Southeast Asia with M.C. Corporation of Tokyo,
Japan. This agreement establishes M.C. Corporation as the exclusive Asian
distributor (other than the South Korean market) for the Company's full line of
proprietary golf equipment and accessories. This alliance gives the Company
sales, marketing and distribution throughout the Asian marketplace with a strong
financial partner (this agreement excludes South Korea, where GolfGear already
has a distribution agreement in place). M.C. Corporation has 325 employees and
interests in real estate and construction, as well as alliances throughout Asia.
On October 29, 1999, M.C. Corporation also made a $2,000,000 equity
investment in the Company. M.C. Corporation purchased 210,526 shares of
convertible preferred stock in the Company; convertible into 2,105,260 shares of
common stock expiring in October 2001. There were also warrants issued in
connection with this financing to purchase 330,000 shares of common stock at an
exercise price of $1.00 per share expiring in October 2002. The preferred stock
will automatically convert into common stock two years from its issuance. Other
material provisions of this agreement include the following: (1) the preferred
stock has one vote per share, and votes on an "as if converted" basis; (2) the
common stock into which the preferred stock is convertible has unlimited
piggyback rights; (3) no new shares of preferred stock senior or equal to the
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preferred stock may be issued for so long as any of the preferred stock is
outstanding; (4) for the one year period after the issuance of the preferred
stock, should the Company issue any securities at an effective price per common
share of less than $0.95, then the Company will adjust the conversion rate of
the preferred stock into common stock to reflect the reduction in the effective
price per common share; (5) M.C. Corporation shall have the right to elect one
member of the board of directors for so long as the preferred stock is
outstanding, and for a period of two years subsequent to conversion of the
preferred stock into common stock; (6) for the five year period after issuance
of the preferred stock, if the Company should sell any shares of common stock or
other securities convertible into common stock in any private or public
transaction, then M.C. Corporation shall have the right to purchase a sufficient
number of the securities that are being sold under the same terms and conditions
in order to maintain its 14.3% equity interest in the Company; and (7) upon
conversion of the preferred stock into common stock, as long as the common stock
continues to be held by M.C. Corporation during the five year period after the
issuance of the preferred stock, the M.C. Corporation shall have the same
anti-dilution rights as if it was still holding the preferred stock. As a
result of the Bel Air Acquisition, the Company will be required to issue
approximately 4,000 additional preferred shares to M.C Corporation for no
additional consideration in order to comply with certain anti-dilution
provisions.
On January 14, 1999, the Company entered into a Distribution Agreement with
GolfGear Korea, Ltd., a South Korean corporation (not affiliated with the
Company). Under the terms of this agreement, this South Korean firm will have
the exclusive rights to distribute products of the Company in that country for a
period of three years. Certain sales performance goals are set forth in that
agreement.
Technology
Almost the entire line of the Company's clubs features its multi-patented
forged insert technology that was invented and developed by Company founder
Donald A. Anderson. The Company currently has eight patents on its forged face
insert technology and three patents on its putter technology.
In the early 1990's, the Company, drawing on twenty years of research, did
what had never been done before: it installed a solid forged face metal insert
into the hitting area of an investment-cast shell. The Company's forged face
clubs combined the density, power and distance of solid forged metals with the
weight distribution, forgiveness and accuracy possible only in investment cast
woods and irons. The result is a club that gives measurably superior
performance because it has a much more solid hitting area with more weight
around the perimeter to provide an extra large sweet-spot.
The Company had the foresight to begin patenting insert technology in 1989,
in the United States and in major international markets, before the January 1,
1992 rule change by the United States Golf Association (USGA) and the Royal and
Ancient (R&A) Golf Club of St. Andrews, Scotland, which legalized insert
technology in both metal woods and irons. As a result, the Company believes that
its patent portfolio with respect to insert technology is the most comprehensive
intellectual property protection package of any participant in the golf club
industry today.
The Company believes that no other company or individual has secured more
coverage, either in the number of patents or in the scope of claims. This
patent technology forms the basis of the Company's business plan to exploit
insert technology as the next wave of golf club design. The Company also
expects that there will be a significant opportunity to generate royalties by
selectively licensing this technology to major golf club manufacturers.
By attaching a solid forged face metal insert into the cavity of a cast
club, the Company believes that it has created the most solid hitting surface in
golf and has put 50% more club head mass where it counts - in the hitting area.
When more mass meets the ball at impact and the mass is forged, not cast,
maximum energy is transferred to the ball and shots travel significantly
farther. Forged metal can do this because it is more dense and has a more solid
molecular structure than cast metals. Investment castings contain gas voids and
parasites that can cause hairline cracks or cave-ins and create dead spots.
Also, their porous finish and inconsistent internal structure can affect
playability.
Management believes that its patents are strong enough to make the Company
a significant player in the golf industry. On January 1, 1992, the face of golf
equipment changed forever when a USGA and R&A rule was changed to allow metal
woods and irons with inserts. The Company was founded in 1990 to prepare for
the changes it anticipated in golf equipment design. In the opinion of
management, the introduction of its patented forged face woods and irons marked
one of the most significant advancements in metal innovation and technology
since the invention of the original metal wood more than 20 years earlier.
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After creating and patenting the solid steel forged face insert, the
Company has continued to stake out new ground, securing multiple domestic and
international patents for designs and inserts in several other materials such as
forged titanium, steel, aluminum, beryllium copper and related alloys. The
Company's patents also include variable face thickness technology. The Company
has continued to retain and expand its position as the world leader in insert
technology with the introduction of its Ti-Gear Irons, Ti-Gear Woods, Ti-Gear
All Titanium Woods, Arrowline Series of putters, and Tsunami titanium woods.
Forged Face insert technology offers significant performance advantages.
The Company's equipment offers levels of performance that golfers all over the
world look for in a club, such as:
- - Greater distance
- - Huge sweet-spot
- - Pin-point control
- - Greatly reduced vibration
- - Increased velocity, accuracy and forgiveness
- - Product identity
The Company's TourGear Forged Face Metal Wood ranked at the top in a 1994
evaluation by ALBA, one of Japan's most respected golf magazines. The
evaluation included ten over-sized metal woods, judged by distance, accuracy,
feel and appearance. Most major competitors participated except for Callaway's
Big Bertha. The Company's TourGear Forged Face Metal Wood was the only product
to have received an "A" ranking in all four categories. The Company's Ti-Gear
driver finished second in overall driving on the Senior PGA tour in 1998.
Product Line
The Company's core product line is the Ti-Gear woods and irons. Both woods
and irons feature forged titanium inserts that are inset into stainless steel
shells, which incorporate the latest in graphite shafts and grips. The Company
has recently introduced a new Ti-Gear all-titanium driver in a 9-degree loft
named "Tsunami," to compliment the existing 9.5-degree loft Ti-Gear driver. At
310 cc and 340 cc in volume, the Tsunami will be the Company's entry in the
super-size driver category. The main body of the all-titanium Ti-Gear driver is
cast from aerospace-certified 6AL4V titanium and the face is fitted with a solid
forged Beta titanium insert.
The Company's patented insert technology is unique because it can be
applied to any new trend in golf clubs such as size or shape. The Company
already has developed prototypes of several additional irons using this
technology. Although brand name golf equipment companies become known by their
general consumer acceptance, golfers today have a tendency to be attracted more
by performance and technology and less by a name brand. Companies can become
even more well known for their technological superiority.
Golfers around the world are looking for an individual club that will
assist them when their skill level is overmatched. Many golfers search for a
more compromising sand wedge, putter, driver, or trouble club (such as the #7
wood). The Company is prepared to add a full collection of trouble clubs and
short game clubs. Insert technology can be applied to any club. The Company
will be expanding its Arrowline Series of putters featuring the Arrowline
patented alignment concept. The Company has successfully marketed the original
Arrowline putter series for several years. The Company also plans to expand
into a full line of utility clubs. The Company believes that the single club
market will continue to grow and the Company's insert technology can play a
major role in gaining identity in this niche market.
While the current line being sold is the Ti-Gear woods and irons, the
Company has introduced a new product to supplement its Ti-Gear line. The "Ti"
in Ti-Gear is the symbol for titanium. The Company over the years has used
names such a TourGear, Precision Gear, Gear Collection and Master Gear. In this
case the name represents Titanium Gear, or abbreviated, Ti-Gear. This new line
is called Tsunami fairway woods, and features clubs with a new insert material
which will be an option in the current Ti-Gear product line. Part of this new
line was introduced at the International PGA Show in January 1999 in Orlando,
Florida. This new product line initially consists of a new line of fairway
woods. The new iron (MG-3) will be a new lower profile design. The Company does
not currently intend to delete any product lines. Production on this new line
commenced in January 2000.
In January 2000, the Company also formally introduced its new "Tsunami" driver
to the market at the 2000 PGA show in Orlando, Florida. This driver was
developed to compete with several major name brand over-sized drivers, including
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Ping (ISI), Yonex, Callaway, Taylor Made, and Katana, among others. The Tsunami
driver is a state of the art design in material technology and utilizes the
Company's multi-patented forged face insert technology. To compliment the
Tsunami driver, the Company has developed a fairway wood, which will also be
marketed under the name Tsunami, which is expected to be ready for full scale
marketing by the end of April 2000.
Bel Air Golf Companies Acquisition
On October 1, 1999, the Company entered into an agreement to acquire all of
the operating assets of Bel Air Golf Companies, including the "Bel Air Golf" and
"Players Golf" trade names, consisting of inventory and intangible assets. The
Bel Air Golf Companies were acquired by new management in 1997 and had
consolidated unaudited revenues of approximately $2,000,000 for the year ended
December 31, 1998. Players Golf offers a full line of junior golf clubs, and
Bel Air Golf is known primarily for golf glove products that offer both value
and quality. Bel Air Golf and Players Golf will be operated as a separate
division of GolfGear.
In consideration for acquiring these assets, the Company assumed
liabilities of approximately $50,000 and issued 400,000 shares of its
restricted common stock. The Company also agreed to issue 255,000 warrants
exercisable at $1.00 per share for a period of six months from closing, 100,000
warrants exercisable at $1.00 per share for a period of one year from closing,
and 100,000 warrants exercisable at $1.00 per share, 100,000 warrants
exercisable at $2.00 per share and 100,000 warrants exercisable at $3.00 per
share, vesting and exercisable only if net revenues from Bel Air Golf and
Players Golf reach $1,500,000, $2,000,000 and $2,500,000 in 2000, 2001 and 2002,
respectively. The Company issued 250,000 of the 400,000 shares on November 29,
1999 as an advance, in order to be able to operate the Bel Air Golf Companies on
an interim basis. The Company also issued 10% of the securities described above
as a finder's fee with respect to this transaction. This transaction closed on
April 11, 2000.
Rugg Acquisition
On May 16, 1998, the Company entered into an Agreement for Sale and
Purchase of Assets with Douglas Rugg for the acquisition of certain assets.
This agreement covers: (i) all rights and interest in and to the design of golf
bags and a golf bag carrying case, including technology know-how and all
documentation thereto; (ii) the design to all eye-wear which is currently in
development; (iii) the name "Executive Trail Blazer Golf Bag"; (iv) all books,
records and customer and supplier lists used in his business; (v) all rights and
interest in and to patents, trademarks, rights under contracts, leases, and
claims or causes of action related to these assets or the business; (vi) all
inventory relating to golf bags and sunglasses, including in process, finished
and parts therefor; and (vii) all machinery and equipment relating to the
assembly and/or shipping of the inventory. These assets were determined by the
Company to be impaired and were written off as of December 31, 1998.
In consideration for acquiring these assets, the Company paid the
following: (i) the sum of $10,000; (ii) 125,000 shares of the Company's
restricted common stock valued at $1.00 per share, with "piggyback" registration
rights; and (iii) a 3% royalty on gross sales of all the merchandise and
products covered by this agreement which are sold by the Company commencing
September 30, 1998. In connection with this acquisition, Mr. Rugg agreed to
furnish certain consulting services to the Company. This transaction was
completed on November 11, 1998. No royalties have been paid under the
agreement.
Source of Supply
There are five primary components that are necessary to produce a golf
club. The Company currently purchases heads from two suppliers, and has access
to several manufacturers that are able to produce the same technology with the
same quality standards with competitive pricing. The Company will continue to
test components produced by other vendors in the event that they will be needed
as product demand increases. The Company is not dependent on one supplier. The
Company is constantly working on new materials and sources of supply in the
event that additional vendors are necessary.
Patents and Know-How
The Company's ability to compete effectively with other golf companies may
be dependent, to a large degree, upon the proprietary nature of its
technologies. The Company has eight United States patents and one international
patent relating to the forged face technology and four patents relating to the
Company's putter technology. The Company also has several patent applications
pending. The patents for insert technologies represent an evolution that took
place over a period of several years. The first patents cover simple
<PAGE>
combinations of forged and cast elements brought together to form a golf club
head. Later filed patents have been directed toward alternative mechanisms for
holding the component parts together and alternative versions using various
combinations of metals including titanium. Titanium is now recognized
throughout the industry as a superior metal for use in golf clubs. The patented
putters include several devices that provide an alignment mechanism. A "virtual
ball" marker allows the user to visualize the hit before the club is swung.
This enables the club to be aligned to the ball, allowing the user to hit from
the sweet-spot of the club. Additionally, the putter clubs have heel and toe
weighting to minimize club head rotation on impact, ensuring a straighter shot.
In general, the level of protection afforded by a patent is directly
proportional to the ability of the patent owner to protect and enforce its
rights under the patent. Since the financial resources of the Company are
limited, and patent litigation can be both expensive and time-consuming, there
can be no assurance that the Company will be able to successfully prosecute an
infringement claim in the event that a competitor utilizes a technology that
infringes on one or more of the patents owned by the Company. The Company also
relies, to an extent, on unpatented know-how, trade secrets and technology, and
there can be no assurance that other companies may not independently develop
substantially identical technologies, or obtain unauthorized access to the
Company's technologies.
The Company received its eighth domestic patent (patent No. 5,720,673) on
insert technology on February 4, 1998. The new patent further broadens the
scope of the Company's insert patent portfolio. The new patent has a primary
function of providing a means of affixing the face insert to a cast club head.
The insert is set into a recess, and locked into place by material being pushed
over the edge of the insert, thus locking it permanently into place. The
Company has also received a patent which was issued in Taiwan. The Company has
several other patents pending both domestically as well as internationally. The
Company will continue to focus on expanding its patent coverage on insert
technology.
Licensing of Technology
On August 12, 1998, the Company entered into a license agreement with
Confidence Golf, Inc., whereby the Company licensed Confidence Golf, Inc. on a
non-exclusive basis to use its forged insert technology.
<PAGE>
On November 19, 1998, the Company entered into a similar licensing
agreement with Wilson Sporting Goods Company to also use the Company's forged
insert technology. Under the terms of this agreement, Wilson agreed to pay
royalties as follows: (a) for irons: $1.00 per club for the first 250,000 sold,
$0.75 per club for the next 250,000 up to 500,000, and $0.50 for over 500,000;
and (b) for woods: $1.00 per club for the first 500,000 and $0.75 per club over
500,000.
On November 17, 1999, the Company entered into a license agreement with
PowerBilt Golf. This agreement grants to PowerBilt a non-exclusive license to
sell, offer to sell, use, and otherwise dispose of certain licensed products
utilizing licensed patent rights in all non-Asian countries and in Korea (this
specifically excludes Japan, Singapore, Hong Kong, the Philippines, Malaysia,
Indonesia, and Taiwan). This agreement also grants to this company a
non-exclusive license to make or have made certain licensed products utilizing
the patent rights anywhere. Under the terms of this agreement, royalties are to
be paid as follows: (a) for irons, $1.15/club for first 250,000, $.75/club for
next 250,000 to 500,000, $.50/club for 500,000 up; and (b) for woods, $1.15/club
for first 500,000, $.75/club for 500,000 up.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 12771 Pala Drive, Garden Grove,
California 92841, which consists of approximately 10,000 square feet of office
and warehouse space. These offices are covered by a three-year lease agreement
which expires on February 1, 2003. The Company expects that this facility will
be adequate for the Company's operations during the term of this lease.
ITEM 3. 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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1999.
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
From December 11, 1997 through approximately November 1999, the common
stock of the Company has traded on the OTC Bulletin Board under the symbol
"GEAR". From approximately December 1999 through February 2000, the common
stock was traded in the over the counter market. During March 2000, the common
stock was relisted on the OTC Bulletin Board. The following table sets forth the
range of reported closing bid prices of the common stock during the periods
indicated. Such quotations reflect prices between dealers in securities and do
not include any retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. The information set forth below was obtained
from America Online, Inc. The trading market is limited and sporadic and should
not be deemed to constitute an "established trading market."
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended December 31, 1999:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
First Quarter $ 2.00 $ 0.87
Second Quarter 1.25 0.75
Third Quarter 0.87 0.25
Fourth Quarter 1.31 0.08
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended December 31, 1998:
- --------------------------------------------
First Quarter 6.19 2.50
Second Quarter 2.50 1.50
Third Quarter 3.00 1.25
Fourth Quarter 2.38 0.94
</TABLE>
Holders
As of March 31, 2000, there were 183 shareholders of record of the
Company's common stock.
Dividends
Holders of common stock are entitled to receive dividends, if, as and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and outstanding. The Company has not paid any cash dividends on its
common stock and has no present intention of paying cash dividends in the
foreseeable future. It is the present policy of the Board of Directors to
retain all earnings to provide for the future growth and development of the
Company's business operations.
Sales of Unregistered Securities
<PAGE>
The Company issued 210,526 shares of its convertible preferred stock on
October 29, 1999 to M.C. Corporation for the sum of $2,000,000 under a Binding
Subscription for Purchase of Equity Securities agreement. The following fees
were paid in connection with this financing: (a) a finder's fee in the amount of
$200,000, (b) warrants to purchase 20,000 shares of common stock at $1.00 per
share, and (c) 1% of all royalties to be received by the Company.
On June 16, 1999, the Company sold 66,667 shares of its common stock to
Bidwell Trust for $50,000 pursuant to an agreement to sell up to 500,000 shares
to that same investor (no discounts or commission were paid in connection with
this sale). On August 31, 1999, the agreement expired with no further sales
being made.
During 1998, the Company raised gross proceeds of $1,587,500 (out of a
maximum offering of $2,000,000) from a private placement of 1,587,500 shares of
its common stock at a price of $1.00 per share. In connection with this private
placement, which commenced on January 1, 1998 and concluded on June 30, 1998,
the Company paid commissions and fees of $12,450, issued 160,000 shares of
common stock valued at $160,000 for services rendered and issued warrants to
purchase 217,000 shares of common stock exercisable at $2.00 per share through
March 1, 2001, and warrants to purchase 31,050 shares of common stock
exercisable at $1.20 per share through December 29, 2000.
During 1997, the Company raised gross proceeds of $1,037,500 (out of a
maximum offering of 1,500,000) from a private placement of its common stock that
commenced on September 1, 1997 at a price of $.57 per share and $50,000 from
private placements that commenced on December 12, 1997 at a price of $1.00 per
share. In connection with this private placement, which were concluded by
December 31, 1997, the Company paid commissions and fees of $101,250, issued
499,002 shares of common stock valued at $282,000 for services rendered and
issued warrants to purchase 1,057,500 shares of common stock exercisable at $.28
per share through October 1, 2002, and warrants to purchase 5,000 shares of
common stock exercisable at $1.20 per share through December 29, 2000.
On October 1, 1998 and December 31, 1997, accounts payable in the aggregate
amount of $100,000 and $89,983, respectively, were converted into 100,000 shares
and 157,204 shares, respectively, of the Company's common stock. No commissions
or fees were paid in connection with this sale.
On October 11, 1998, the Company paid $10,000 in cash and issued 125,000
shares of its common stock valued at $125,000 for the purchase of a golf
accessory business (Rugg Acquisition). No commissions or fees were paid in
connection with this sale.
On December 31, 1997, the Company's President, Donald Anderson, converted
his accrued salaries of $115,770 into 154,360 shares of the Company's common
stock at $.75 per share. No commissions or fees were paid in connection with
this sale.
For the year ended December 31, 1998, the Company issued 256,033shares
valued at $275,635, all for services received. No commissions or fees were paid
in connection with these sales.
On January 1, 1999, July 1, 1998, and December 31, 1997, warrants to
purchase 50,000 shares, 150,000 shares, and 119,799 shares, respectively, at
prices ranging from $0.28 to $2.00 per share were issued to non-employees for
services rendered. During the year ended December 31, 1999, warrants to
purchase 79,000 shares at prices ranging from $0.50 to $2.00 per share were
issued to non-employees for services rendered. No commissions or fees were paid
in connection with this sales.
On November 29, 1999, the Company issued 275,000 shares of its common stock
as an advance towards the acquisition of certain assets of Bel Air Golf
Companies.
All of the above offerings were undertaken pursuant to the limited offering
exemption from registration under the Securities Act of 1933, as amended, as
provided in Rule 506 under Regulation D as promulgated by the U.S. Securities
and Exchange Commission, and offers and sales were made only to "accredited
investors." These offerings met the requirements of Rule 506 in that: (a) there
are no more than or the Company reasonably believed that there were no more than
35 purchasers of securities from the issuer in any offering under this section;
and (b) each purchaser who is not an accredited investor is a "sophisticated
investor," that is, the investor either alone or with his purchaser
representative(s) has such knowledge and experience in financial and business
<PAGE>
matters that he is capable of evaluating the merits and risks of the prospective
investment, or the Company reasonably believed immediately prior to making any
sale that such purchaser came within this description.
Under Rule 506, an accredited investor is not counted in the number of
investors permitted. An accredited investor includes: (a) any natural person
whose individual net worth, or joint net worth with that person's spouse, at the
time of his purchase exceeds $1,000,000; and (b) any natural person who had an
individual income in excess of $200,000 in each of the two most recent years or
joint income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching the same income level in the
current year.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The following management's discussion and analysis of financial condition
and results of operations reviews the financial performance of the Company for
the years ended December 31, 19997 and 1998, and should be read in conjunction
with the Company's consolidated financial statements and notes thereto.
For accounting purposes, the acquisition of GGI by Harry Hurst, Jr., Inc.
has been treated as a reverse acquisition of GGI with GGI considered the
acquiror. The historical financial statements prior to December 5, 1997 are
those of GGI. All information in the financial statements has been
retroactively restated to reflect his transaction.
The consolidated financial statements include the accounts of the Company,
Its wholly-owned subsidiary, GGI, Inc. and GGI, Inc.'s wholly-owned
subsidiaries, Gear Fit Golf Company and Pacific Golf Holdings, Inc. All
significant inter-company transactions and balances have been eliminated in
consolidation.
Major Developments
On October 1, 1999, the Company entered into an agreement to acquire all of
the operating assets of Bel Air Golf Companies, including the "Bel Air Golf" and
"Players Golf" trade names, consisting of inventory and intangible assets. The
Bel Air Golf Companies were acquired by new management in 1997 and had
consolidated unaudited revenues of approximately $2,000,000 for the year ended
December 31, 1998. Players Golf offers a full line of junior golf clubs, and
Bel Air Golf is known primarily for golf glove products that offer both value
and quality. Bel Air Golf and Players Golf will be operated as a separate
division of GolfGear.
In consideration for acquiring these assets, the Company assumed
liabilities of approximately $50,000 and issued 400,000 shares of its
restricted common stock. The Company also agreed to issue 255,000 warrants
exercisable at $1.00 per share for a period of six months from closing, 100,000
warrants exercisable at $1.00 per share for a period of one year from closing,
and 100,000 warrants exercisable at $1.00 per share, 100,000 warrants
exercisable at $2.00 per share and 100,000 warrants exercisable at $3.00 per
share, vesting and exercisable only if net revenues from Bel Air Golf and
Players Golf reach $1,500,000, $2,000,000 and $2,500,000 in 2000, 2001 and 2002,
respectively. The Company issued 250,000 of the 400,000 shares on November 29,
1999 as an advance, in order to be able to operate the Bel Air Golf Companies on
an interim basis. The Company also issued 10% of the securities described above
as a finder's fee with respect to this transaction. This transaction closed on
April 11, 2000.
The acquisition of the assets of the Bel Air Golf Companies is expected to
have a material impact on the Company's operations. The Company expects that it
will generate in excess of $1,000,000 in sales from the Bel Air product lines in
2000, at gross margins somewhat lower than the Company's 40% gross margin
generated during the year ended December 31, 1999.
<PAGE>
During September 1999, the Company completed a distribution agreement with
M.C. Corporation of Tokyo, Japan. This agreement establishes M.C. Corporation
As the exclusive Asian distributor (excluding South Korea) for the Company's
full line of proprietary golf equipment and accessories. This alliance provides
the Company with marketing and distribution in Asia with a strong financial
partner, and is expected to have a positive impact on operations in 2000 and
beyond.
<PAGE>
Results of Operations
Years ended December 31, 1999 and 1998
Net sales increased to $2,302,407 in 1999 from $1,244,119 in 1998, an
increase of $1,058,288 or 85.1%, as a result of increased unit sales and
increasing market acceptance of the Company's proprietary forged face insert
technology.
Gross profit increased to $922,552 in 1999 from $306,385 in 1998, and
increased as a percentage of net sales to 40.1% in 1999 from 24.6% in 1998. The
increase in gross profit margin in 1999 as compared to 1998 was due to the
introduction of new, higher-margin products, as well as a shift in the sales mix
in 1999 as compared to 1998.
Selling and marketing expenses decreased by $83,920, to $573,933 in 1999
(24.9% of sales) from $657,853 in 1998 (52.9% of sales), as a result of reduced
selling and marketing activities and the Company's cost control efforts. Selling
and marketing expenses decreased as a percent of sales in 1999 as compared to
1998 as a result of the Company employing sales and marketing efforts more
selectively and efficiently to market and promote its products.
Tour and pro contract expenses decreased by $288,246, to $191,315 in 1999
(8.3% of sales) from $479,561 in 1998 (38.5% of sales), as a result of a reduced
emphasis and reliance on the services of touring professionals to promote the
Company's products.
General and administrative expenses increased by $47,026, to $1,177,268 in
1999 (51.1% of sales) from $1,130,242 (90.8% of sales) in 1998.
On May 16, 1998, the Company entered into an Agreement for Sale and
Purchase of Assets with Douglas Rugg for the acquisition of certain assets. The
Company paid $10,000 cash, and completed this transaction on November 11, 1998
by issuing 125,000 shares of common stock valued at $125,000. The Company wrote
off the assets acquired as of December 31, 1998.
During 1998, the Company incurred aggregate costs of $503,567 with respect
to the preparation and filming of an infomercial. At December 31, 1998,
management reviewed the Company's infomercial marketing program and determined
that it was unlikely to be successful and, accordingly, such costs were charged
to operations at December 31, 1998.
Depreciation and amortization decreased by $4,761, to $51,898 in 1999 from
$56,659 in 1998 as a result of decreased depreciation and amortization recorded
relating to property and equipment and patents and trademarks.
Interest expense increased by $18,488, to $55,701 in 1999 from $37,213 in
1998, as a result of an increase in the level of interest-bearing debt incurred
to finance operations.
The Company recorded a provision for bad debts of $240,069 in 1999, as
compared to $39,448 in 1998. The increase of $200,621 was primarily due to a
dispute with a former customer that was settled during 1999.
Net loss was $1,360,999 for the year ended December 31, 1999, as compared
to a net loss of $2,730,170 for the year ended December 31, 1998.
Liquidity and Capital Resources - December 31, 1999
During the years ended December 31, 1999 and 1998, the Company has financed
its working capital requirements principally from the private placement of its
common stock. During the years ended December 31, 1999 and 1998, net proceeds
from the sale of common stock were $1,835,452 and $1,415,050, respectively.
Such funds have periodically been supplemented with short-term borrowings under
the Company's bank line of credit and other private sources. This bank line of
credit is unsecured, has a maximum borrowing level of $70,000, and is personally
guaranteed by the President of the Company.
During the years ended December 31, 1999 and 1998, the Company's operations
utilized cash of $950,162 and $1,512,887, respectively. As of December 31,
1999, the Company had working capital of $776,327, as compared to a working
capital deficiency of $187,639 at December 31, 1998. The Company's current
<PAGE>
ratio was 1.83:1 at December 31, 1999, as compared to 0.80:1 at December 31,
1998. Although this working capital deficiency did not have an effect on the
Company's ability to meet its obligations as they come due during 1999 due to
private offering stock sales and other sources of financing, the Company has in
the past periodically had to defer or decline orders due to insufficient working
capital.
During the years ended December 31, 1999 and 1998, the Company expended
$40,101 and $88,654, respectively, for the purchase of property and equipment.
The Company did not have any capital expenditure commitments outstanding at
December 31, 1999, although the Company anticipates making capital expenditures
in the ordinary course of business commensurate with an expected increase in the
Company's business operations in subsequent periods and with respect to its
relocation to new facilities in February 2000.
During the year ended December 31,1999, the Company reduced its bank line
of credit by $31,241, as compared to increasing it by $4,769 during the year
ended December 31, 1998. During the years ended December 31, 1999 and 1998, the
Company received proceeds from short-term borrowings of $50,000 and $65,000,
respectively. During the years ended December 31, 1999 and 1998, the Company
repaid short-term borrowings of $65,494 and $34,797, respectively. The Company
also repaid notes payable to shareholders of $34,779 in 1999.
Although the Company believes that it has adequate operating capital to
support its operations at current levels during 2000, the Company will require
substantial additional operating capital during 2000 to prepare and broadcast an
infomercial, establish its own assembly facility, and finance the expansion of
its business. Should adequate working capital not be available in the future on
a timely basis and under acceptable terms and conditions to fund the Company's
operations, the Company may have to substantially reduce its operations to a
level consistent with its available working capital resources.
Year 2000 Issue
The Year 2000 Issue results from the fact that certain computer programs
have been written using two digits rather than four digits to define the
applicable year. Computer programs that have sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
As of December 31, 1999, the Company had completed any required
modifications to its software to ensure that its software systems were Year 2000
compliant. The cost of such modifications was not material.
Since the date rollover on January 1, 2000, the company has not experienced
any material adverse effect from the Year 2000 Issue. While the primary risk to
the Company with respect to the Year 2000 Issue continued to be the ability of
third parties to provide goods and services in a timely and accurate manner, the
Company has not experienced any such disruption to date. The Company does not
expect any remaining risks with respect to the Year 2000 Issue to have a
material adverse effect on the Company.
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 and disclosures.
ITEM 7. FINANCIAL STATEMENTS
<PAGE>
The consolidated financial statements are listed at the "Index to
Consolidated Financial Statements" elsewhere in this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table and text sets forth the names and ages of all directors
and executive officers of the Company as of March 31, 2000. The Board of
Directors is comprised of only one class. All of the directors will serve until
the next annual meeting of stockholders and until their successors are elected
and qualified, or until their earlier death, retirement, resignation or removal.
There are no family relationships among directors and executive officers. Also
provided is a brief description of the business experience of each director and
executive officer during the past five years and an indication of directorships
held by each director in other companies subject to the reporting requirements
under the Federal securities laws.
Name Age Positions
- ------- ----- -----------
Donald A. Anderson 49 President and Director
Robert N. Weingarten 46 Chief Financial Officer,
Secretary and Director
Frank X. McGarvey 55 Director
Naoya Kinoshita 34 Director
Biographies of Directors and Executive Officers:
Donald A. Anderson. Mr.Anderson has been in the golf business for his entire
adult life. He taught golf at his home course at 19, and played as a golf
professional in local events. In 1973, Mr. Anderson became director of sales
and marketing of R.A.C.O. Manufacturing, a foundry in Whittier, California,
which produced putters for nearly every major golf club maker in the industry
including the Ben Hogan Company, Spalding, Wilson Sporting Goods, MacGregor, H
and B, Northwestern Golf and Pinseeker to name a few. In 1980, Mr. Anderson
moved to Chicago to become director of sales for the Northwestern Golf Club
Company, which at the time was the world's largest exclusive manufacturer of
golf clubs. While at Northwestern, Mr. Anderson pioneered the development and
introduction of the original metal wood, and worked to engage several touring
professionals to the staff. Mr. Anderson signed Nancy Lopez, Tom Weiskopf, Jim
Thorpe, Judy Rankin, Marlene Hagge, Tom Shaw, Bob Murphy, J. C. Snead, George
Low and Hubert Green. In 1986, Mr. Anderson became a consultant for Slotline
Golf Company. In 1987, Mr. Anderson became vice president of the Stan Thompson
Golf Club Company, a 50 year old manufacturer of golf clubs. After completing a
three year contract at Stan Thompson in December 1989, Mr. Anderson founded the
Company.
Robert N. Weingarten. Mr. Weingarten has served as Chief Financial Officer,
Secretary and a Director since joining the Company in October 1997. From July
1992 to the present, he has been the sole shareholder of Resource One Group,
Inc., a financial consulting and advisory company. From January 1, 1997 through
July 31, 1997, Mr. Weingarten was a principal in Chelsea Capital Corporation, a
merchant banking firm. Since 1979, Mr. Weingarten has served as a consultant
with numerous public companies in various stages of development, operation or
reorganization. Mr. Weingarten received an M.B.A. in Finance from the
University of Southern California and a B.A. in Accounting from the University
of Washington. Mr. Weingarten is an officer of Casmyn Corp., a publicly held
mineral resource development company.
Frank X. McGarvey. Mr. McGarvey specializes in financial consulting for
emerging growth companies. He is also a director and the chief operating
officer of Colori Inc., which operates under a joint venture agreement with Gi
Picco's Cosmetics SRL, a large European cosmetic company. He was associated
with Jefferson Research of Portland, Oregon, a company engaged in equities
research for money management firms. He was the co-founder of Stoller Chemical
Company and founder of Micron Corp. He holds a B.S. degree in Chemical
Engineering from the University of Pennsylvania. Mr. McGarvey was appointed a
Director of the Company in October 1997.
<PAGE>
Naoya Kinoshita. Mr. Kinoshita is President of M.C. Corporation, which he
founded in 1990 and is involved in real
estate development and management. In 1995, Mr. Kinoshita began development,
construction and sales of generational
housing; i.e., housing for two generations of family (parents and offspring
under one roof), as well as imported housing
sales from outside Japan. During the same year he started an Internet service
provider business. In 1996, Mr. Kinoshita
combined his experience in real estate development and the Internet to construct
and sell the first Internet line pre- stalled condominium in Japan. More
recently, he commenced the design, construction, and sales of 2x4 housing which
utilized fewer chemicals, and more natural materials to promote healthy living
for the resident. Mr. Kinoshita has extensive expertise in real estate
development, information processing, sales, management, and distribution. Mr.
Kinoshita has served as a Director since October 1999.
Key Employees
Nathan A. Lopez, Vice President of Sales and Marketing
Mr. Lopez, age 41, has nearly fifteen years experience in pioneering new
material technologies in the golf industry. From 1986 to 1992, Mr. Lopez served
as the head design and material expert at Aldila Inc., where he successfully
developed the second generation of advanced composite golf shafts that propelled
companies like Taylor Made and Callaway Golf into their respective leadership of
golf hard goods. From 1992 to 1995, Mr. Lopez directed Easton Aluminum in the
development, marketing and sales of the second generation aluminum and
aluminum/carbon golf shafts into the OEM and custom club maker market. He
joined Winn Grips in 1995 and is credited with pioneering the market niche for
this new advanced polymer golf grip. Within three years, Winn Grips had become
the premium golf grip in the golf industry. Mr. Lopez joined the Company in
October 1998.
Rhonda Jurs, Director of Sales
Ms. Jurs, age 35, has more than fourteen years in the golf industry, and
possesses substantial experience in telemarketing sales. She began her golf
career at Slotline Golf in the production department and gained first-hand
knowledge of club manufacturing. She quickly moved into marketing where she
developed Slotline's customer service department. From 1986 through 1997, Ms.
Jurs was a leader in Slotline's telemarketing department. As Key Accounts
Manager, she worked with the volume retailers and supervised the inside sales
team. She joined the Company in January 1998.
Brian Jacobsen, Controller
Mr. Jacobsen, age 55, has over 20 years of experience in financial
management. He joined the Company in May 1998 and works with all financial
aspects of the Company. From February 1993 to May 1998, Mr. Jacobsen served as
controller for Hart Tool Co. (a hammer manufacturer and distributor), where he
headed the accounting department. Previously he was employed for 5 years as a
junior accountant at Ram Golf Corp. and 6 years as controller for Confidence
Golf Corp. (both companies are golf club distributors). As a result, Mr.
Jacobsen brings the Company a financial background combined with an
understanding of the golf industry.
Mark Collins, Director of Manufacturing
Mark Collins, age 38, began his industry career in 1983. While working as
machinist for a California tooling company, Mr. Collins built what is believed
to be the first putter with a "milled face." After honing his skills as a golf
club craftsman at Quality Golf Products of Fountain Valley, California, Mr.
Collins joined Daiwa Golf in 1992. At Daiwa, a recognized leader in the golf
equipment industry, Mr. Collins combined his knowledge of advanced metal alloys
and graphite shafts with expertise in precision manufacturing to build clubs for
well known PGA professionals such as Fuzzy Zoeller, Pete Jordan, Jerry Kelly,
and LPGA notables Amy Alcot and Luciana Benevenuti. He joined the Company in
April 1998.
<PAGE>
Board of Advisors
The following individuals serve as non-compensated advisors to the Company
for the purpose of providing advice and counsel to management:
Douglas J. Rugg
Mr. Rugg, is active in product design. Mr. Rugg designs and develops golf
bags and other accessories for such names as Black Flys; Modern Amusement; Hard
Rock Hotel and Casino; Palmilla Hotel in Cabo San Lucas, Mexico; and Tommy
Hilfiger. Mr. Rugg brings experience in marketing to both the golf and the youth
market.
J. Scott Schmidt
Mr. Schmidt is the former President and Chief Executive Officer of Thompson
Newspapers Corporation, West Group, President and Publisher of American
Collegiate Network, Inc.; President and Chief Executive, Hilton/Schmidt, a media
consulting firm; President and Chief Executive Officer, California Fashion
Publications; President and Chief Executive of Van Nuys Publishing. Before
launching a career in publishing, he served in various senior editorial posts
with the Chicago Tribune and Chicago Today. Mr. Schmidt attended Bradley
University and Northwestern University.
John Zebelean
Mr. Zebelean is the inventor and patent holder for the original investment
cast metal wood, which subsequently became Taylor Made and created a
multi-billion dollar industry. He has since designed metal woods for Pinseeker,
Confidence Golf, Northwestern, Pebble Beach and Spalding. He holds a Ph.D. in
Physics.
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as Amended
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who own more than 10%
of a registered class of the Company's equity securities to file various reports
with the Securities and Exchange Commission concerning their holdings of, and
transactions in, securities of the Company. Copies of these filings must be
furnished to the Company. During the fiscal year ended December 31, 1999, the
Company did not have any class of equity securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended, and accordingly,
was not subject to the reporting requirements of Section 16 of the Securities
Exchange Act of 1934, as amended.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company to
present executive officers and as to all persons as a group who were executive
officers of the Company at any time during the fiscal year ended December 31,
1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual compensation Long-term compensation
- --------------------------------------------------------------------------------------------------------------
Awards Payouts
- --------------------------------------------------------------------------------------------------------------
Other annual Securities
compensation under- All other
Name and Year ($) Restricted lying compensation
principal position Salary Bonus Stock options/ LTIP
($) ($) Award(s) SARs Payouts ($)
($) (#) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald A. 1999 99,000 20,000 15,210(1) 0 0 0 0
Anderson, 1998 52,769 0 15,470(2) 0 0 0 0
President 1997 5,500 50,000 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------
Robert N.
Weingarten,
Chief Financial 1999 36,000 0 0 0 0 0 0
Officer and 1998 36,000 0 0 0 0 0 0
Secretary 1997 9,000 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes $3,822 for medical insurance premiums and $2,388 for life insurance premiums paid on behalf
of Mr. Anderson in 1999. Also includes auto allowance of $9,000.
(2) Includes $3,924 for medical insurance premiums and $2,546 for life insurance premiums paid on behalf
of Mr. Andersonin 1998. Also includes auto allowance of $9,000.
</TABLE>
Annuity or Pension Plans
There are no annuity, pension or other benefits, including long-term
compensation, proposed to be paid to the named officers of the Company as there
is no plan currently existing which provides for such payments by the Company or
any of its subsidiaries.
Employment Contract
The Company has entered into an employment agreement with Donald A.
Anderson, dated July 1, 1998, which expires on December 31, 2002. This
agreement has an automatic renewal provision which allows renewal for a one year
period on the same terms and conditions unless either party gives notice to the
other party of at least ninety (90) days prior to the expiration of the term of
their intention to renew the agreement. The agreement may only be terminated by
the Company if there is a willful breach or habitual neglect of duties relating
to performing terms of the agreement or there are acts of dishonesty, fraud and
misrepresentation. The agreement provides for a base salary of $90,000 per
year, increased by a minimum of 10% annually, and an automobile expense
allowance of $750 per month. In addition to the fixed salary, Mr. Anderson is
to receive under the terms of this agreement a sum equal to five percent (5%) of
the net earnings, as defined, of the Corporation for each fiscal year (provided,
however, such additional compensation for any fiscal year will not exceed
$200,000). Since the date of this agreement, there have been no net earnings
upon which to pay such additional amount.
Board of Directors
<PAGE>
During the year ended December 31, 1999, four meetings of the Board of
Directors were held. All directors attended at least 75% of all board meetings
for which they were eligible to attend. Directors receive no additional
compensation for serving on the Board of Directors, but are reimbursed for
reasonable out-of-pocket expenses incurred in attending board meetings. The
Company had no audit, nominating or compensation committee, or committees
performing similar functions, during the fiscal year ended December 31, 1999.
Stock Option Plan
In October of 1997, the Board of Directors of the Company approved a stock
option plan entitled "GolfGear International, Inc. 1997 Stock Incentive Plan"
("Plan"). This Plan is intended to allow designated officers and employees and
certain non-employees of the Company to receive stock options to purchase the
Company's common stock and to receive grants of common stock subject to certain
restrictions as more fully described in the Plan. The Plan has reserved
2,642,625 shares of common stock, subject to adjustments that may be issued
under the Plan.
The Plan provides for the granting to employees (including employees who
are also directors and officers) of options intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended ("Code"), and for the granting of non-statutory stock options
to directors, employees and consultants. The Plan is currently administered by
the Board of Directors of the Company.
The exercise price per share of incentive stock options granted under the
Plan must be at least equal to the fair market value of the common stock on the
date of grant. With respect to any participant who owns shares representing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive or non-statutory stock option
must be equal to at least 110% of the fair market value of the grant date, and
the maximum term of the option must not exceed five years. The terms of all
other options granted under the Plan may not exceed ten years. Upon a merger of
the Company, the options outstanding under the Plan will terminate unless
assumed or substituted by the successor corporation. As of December 31, 1999,
1,242,085 options were granted under the Plan.
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Ended December 31, 1999)
[Individual Grants]
Name Number of securities Percent of total Exercise or base price Expiration date
underlying options/SARs granted ($/Sh)
options/SARs granted to employees in fiscal
(#) year
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Donald A.
Anderson, 150,000 67% 0.275 August 2001
President
Robert N.
Weingarten,
Chief Financial
Officer and 75,000 33% 0.25 August 2001
Secretary
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of unexercised
Number of securities in-the-money
underlying unexercised options/SARs at FY-
options/SARs at FY-end end ($)
Name Shares acquired on Value realized ($) (#) Exercisable/
exercise (#) Exercisable/ Unexercisable (1)
Unexercisable
(a) (b) (c) (d) (e)
- ------------ ----------------------- ---------------------- --------------------- -------------
<S> <C> <C> <C> <C>
Donald A.
Anderson, - - 384,900 Exercisable/ -
President 117,450 Unexercisable
- ------------ ----------------------
Robert N.
Weingarten,
Chief
Financial
Officer and - - 251,175 Exercisable/ -
Secretary 0 Unexercisable
- ------------ ----------------------
<FN>
(1) The dollar values are calculated by determining the difference between the weighted average
exercise price of the stock options and the market price for the common stock of $0.08 per share at
December 31, 1999. As of December 31, 1999, none of the unexercised options were in-the-money.
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, consisting of sole or shared voting power (including the power to vote
or direct the vote) and/or sole or shared investment power (including the power
to dispose of or direct the disposition of) with respect to the security through
any contract, arrangement, understanding, relationship or otherwise, subject to
community property laws where applicable.
<PAGE>
As of March 31, 2000, the Company had a total of 12,816,348 shares of
common stock issued and outstanding and 219,858 shares of Series A Senior
Convertible Preferred Stock issued and outstanding. Each share of Series A
Senior Convertible Preferred Stock is convertible into ten shares of common
stock, and votes on an "as if" converted basis.
The following table sets forth, as of March 31, 2000: (a) the names and
addresses of each beneficial owner of more than five percent (5%) of the Company
common stock known to the Company, the number of shares of common stock
beneficially owned by each such person, and the percent of the Company's common
stock so owned; and (b) the names and addresses of each director and executive
officer, the number of shares of common stock of the Company beneficially owned,
and the percent of the Company's common stock so owned, by each such person, and
by all directors and executive officers of the Company as a group. Each such
person has sole voting and investment power with respect to the shares of common
stock, except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Name and Address of
Title of Class Beneficial Owner Amount of
Beneficial Ownership (1) Percent of Class
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
Donald A. Anderson,
Common Stock 12771 Pala Drive, Garden 3,181,885 (2) 16.77%
Grove, California 92841
- -----------------------------------------------------------------------------------
M.C. Corporation,
Terasiosu Bldg., 6-7-2
Minami Aoyama,
Minato-ku, Tokyo, Japan
Common Stock 107-0062 2,528,580 (3) 13.32%
- -----------------------------------------------------------------------------------
Berkeley Investment
Group, Ltd., AV.
Libertador, Piso 3 OFC 3-
Common Stock 7, Caracas, Venezuela 2,226,800 (4) 11.73%
- -----------------------------------------------------------------------------------
Robert J. Williams, 62-156
Corporate Way, Thousand
Common Stock Oaks, California 92276 1,442,521 7.60%
- -----------------------------------------------------------------------------------
Frank X. McGarvey,
12771 Pala Drive, Garden
Common Stock Grove, California 92841 965,940 (5) 5.09%
- -----------------------------------------------------------------------------------
Yeon Park, 16582 Gothard
Street, Huntington Beach,
Common Stock California 92646 867,000 (6) 4.57%
- -----------------------------------------------------------------------------------
Robert N. Weingarten,
12771 Pala Drive, Garden
Common Stock Grove, California 92841 827,049 (7) 4.36%
- -----------------------------------------------------------------------------------
Naoya Kinoshita,
Terasiosu Bldg., 6-7-2
Minami Aoyama, Minato-
ku, Tokyo, Japan 107-
Common Stock 0062 75,000 (8) 0.40%
- -----------------------------------------------------------------------------------
Shares of all directors and
executive officers as a 5,049,874 26.61%
Common Stock group (4 persons)
- -----------------------------------------------------------------------------------
<FN>
(1) Other than as footnoted, none of these security holders has the right to
acquire any amount of the Shares within sixty days from options, warrants, rights,
conversion privilege, or similar obligations.
(2) Includes options to purchase 234,900 of shares of common stock at an
exercise price of $.62 per share; an additional 117,450 shares are exercisable
starting in October 2000 (all these options expire in October 2002). Also includes
options to purchase 150,000 shares of common stock at an exercise price of $0.275
per share under the Stock Incentive Plan; these options expire in August 2001.
Also includes 154,360 shares of common stock held in the name of Mr. Anderson's
wife as to which he disclaims beneficial ownership.
(3) Reflects the right to convert 219,858 shares of convertible preferred stock
into 2,198,580 shares of common stock, which right expires in October 2001. Also
includes warrants to purchase 330,000 shares of common stock at an exercise price
of $1.00 per share; these warrants expire in October 2002.
(4) Includes warrants to purchase 1,162,755 shares of common stock at an
exercise price of $.28 per share; these warrants expire in October 2000.
<PAGE>
(5) Includes options to purchase 105,705 shares of common stock at an exercise
price of $.57 per share; these options expire in October 2002. Also includes
options to purchase 75,000 shares of common stock at an exercise price of $0.25 per
share under the Stock Incentive Plan; these options expire in August 2001. Also
includes warrants to purchase 35,235 shares of common stock at $1.00 per share;
these warrants expire in February, 2002.
(6) Includes warrants to purchase 217,000 shares of common stock at $2.00 per
share; these warrants expire in March 2001.
(7) Includes options to purchase 176,175 shares of common stock at an exercise
price of $.57 per share. The options expire in October 2002. Also includes options
to purchase 75,000 shares of common stock at an exercise price of $0.25 per share
under the Stock Incentive Plan; these options expire in August 2001. Also includes
19,200 shares owned by Resource One Group, Inc., which is wholly owned by Mr.
Weingarten.
(8) Naoya Kinoshita is President of M.C Corporation. He has options to purchase
75,000 shares of common stock at an exercise price of $0.275 per share under the
Stock Incentive Plan; these options expire in August 2001.
</TABLE>
Changes in Control:
The Company is unaware of any contract or other arrangement, the operation
of which may at a subsequent date result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Finder's Fee
In July of 1998, the Board of Directors approved the payment of $65,000 as
a finders fee to Donai Anderson, the wife of Donald A. Anderson. This finders
fee was paid for services rendered to the Company in connection with Yeon Park's
investment in the Company. As of December 31, 1998 and 1999, of the $65,000
fee, $26,000 had been paid and the balance of $39,000 was reflected as notes
payable to shareholders in the consolidated financial statements.
Financial Services Agreement
On June 7, 1997, the Company entered into a Financial Services Agreement
with Bridgewater Capital Corporation ("Bridgewater") whereby Bridgewater agreed
to arrange and help consummate a merger between the Company and a public shell
corporation and also assist the Company to analyze, negotiate and advise on
obtaining equity capital or debt financing. Upon the successful completion of
the $500,000 financing in October 1997, the Company paid Bridgewater a fee of
$70,000 and issued 499,002 shares of the Company's common stock, representing
4.99% of the post-reorganization outstanding common stock at the time of the
merger with HHI in December 1997. The Financial Services Agreement required
that Bridgewater be paid a consulting fee of $72,000, payable $6,000 monthly,
have the right to appoint one person to the Board of Directors for two years,
and be paid a 10% finder's fee and 2% nonaccountable expense allowance on all
capital, cash, equity or debt infused into the Company by or through
Bridgewater. This agreement expired in October 1998. Mr. Peschong, a former
Director of the Company, is an officer and shareholder of Bridgewater. The
Company also paid $6,900 to Bridgewater as a capital raising fee during the year
ended December 31, 1998.
On January 27, 1999, the Company executed a letter of understanding with
Bridgewater whereby, among other things, the Company agreed to issue a
promissory note to Bridgewater in the amount of $50,000, all due and payable no
later than April 1, 1999 and to issue common stock warrants entitling
Bridgewater to purchase 105,705 shares of common stock at $0.62 per share which
expire October 2002. The agreement to issue the promissory note and warrants
arose out of ostensible obligations under the Financial Services Agreement. The
execution of the letter of understanding was in anticipation of and contingent
upon an anticipated equity financing which did not materialize.
The Company asserted a claim against Bridgewater for certain damages that
the Company alleged it had suffered, which the Company believed to be occasioned
by Bridgewater's malfeasance. As a result, on April 8, 1999, the Company issued
a stop order relating to all of the 499,002 shares previously issued. During
January 2000, the Company settled its claims with Bridgewater whereby the
<PAGE>
Company agreed, among other things, to pay Bridgewater $16,667 by June 1, 2000
and to release the stop order relating to the 449,002 shares of common stock.
Consulting Agreement
On October 1, 1998, the Company executed a Consulting Agreement with Sports
Opportunities International, a South Carolina corporation, owned by Parker
Smith, a former Director of the Company. This agreement required a payment of
$40,000 a year to be paid in four equal quarterly installments which commenced
on January 1, 1999. The Consulting Agreement also granted stock options for the
purchase of 50,000 shares of common stock at $2.00 per share, 20,000 of which
vested upon execution of this agreement; 15,000 of which vested six months of
execution of this agreement, and the remaining 15,000 which vested one year
after execution of this agreement. The Consulting Agreement also provided for a
$0.25 royalty to be paid for each golf club sold through companies or
distributors introduced to the Company by Mr. Smith. The Agreement had a term of
one year, and expired without being renewed on October 1, 1999. Mr. Smith
resigned as a director of the Company during March 2000.
License Agreement
On August 12, 1998, the Company executed a License Agreement with
Confidence Golf, Inc., a California corporation formerly owned by Robert J.
Williams, who is a former Officer and a Director, and currently a major
stockholder of the Company. Confidence Golf, Inc. was purchased by Family Golf
Centers, Inc. in December 1997. Pursuant to the License Agreement, the Company
has licensed to Confidence Golf, Inc. a non-exclusive worldwide right to utilize
the Company's patented forged insert technology in the manufacture and sale of
golf clubs. The License Agreement provides for royalties to be paid at the rate
of $2.00 per iron and $2.50 per wood for each golf club, component made, used or
sold worldwide. The License Agreement expires upon termination of all patents
and patent applications, or in the event that royalty payments are not timely
made or there is a material breach of this agreement.
<PAGE>
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: A list of exhibits required to be filed as part of this
report is set forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K: The Company did not file any Current Reports on
Form 8-K during or related to the three months ended December 31, 1999.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this registration statement to be signed on its behalf by the undersigned
thereunto duly authorized.
GOLFGEAR INTERNATIIONAL, INC.
---------------------------------------
(Registrant)
Date: April 13, 2000 By: /S/ Donald A. Anderson
---------------------------
Donald A. Anderson
President
In accordance wit the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: April 13, 2000 By: /S/ Donald A. Anderson
---------------------------
Donald A. Anderson
President and Director
Date: April 13, 2000 By: /S/ Robert N. Weingarten
-----------------------------
Robert N. Weingarten
Chief Financial Officer and Director
Date: April 13, 2000 By:
Frank X. McGarvey
Director
Date: April 13, 2000 By:
/S/ Naoya Kinoshita
- ------
Director
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Numbe Description of Document
<C> <S>
3.1 Articles of Incorporation(1)
- ------- -------------------------------------------------------------------------------
3.2 Certificate of Amendment of Articles of Incorporation(1)
3.3 Certificate of Amendment of Articles of Incorporation(1)
3.4 Articles of Merger(1)
3.5 Bylaws(1)
4.3 Binding Subscription Agreement for Purchase of Equity Securities (M.C.
Corporation)(1)
4.4 Certificate of Determination(1)
10.1 Distribution Agreement (M.C. Corporation)(1)
10.2 Distribution Agreement (GolfGear Korea, Ltd.)(1)
10.4 Agreement for Sale and Purchase of Assets (and accompanying Consulting
Agreement) (Douglas Rugg)(1)
10.5 License Agreement (Confidence Golf, Inc.)(1)
10.6 License Agreement (Wilson Sporting Goods Company)(1)
10.10 Employment Agreement (Donald A. Anderson)(1)(C)
10.11 GolfGear International, Inc. 1997 Stock Incentive Plan(1)(C)
10.12 License Agreement (PowerBilt Golf)(1)
10.13 Property Lease Agreement(2)
Amended and Restated Agreement for Sale and Purchase of Assets between Bel Air
10.14 Golf Company and GolfGear International, Inc.(2)
21 Subsidiaries of the Registrant(2)
27 Financial Data Schedule(E)
99.1 Patents(1)
99.2 Trademarks(1)
<FN>
- -----------------------------
(1) Previously filed as an Exhibit to the Company's Registration Statement on Form
10-SB dated November 11, 1999, and incorporated herein by reference.
(2) Filed herein.
(C) Indicates compensatory plan, agreement or arrangement.
(E) Indicates electronic filing only.
</TABLE>
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
Subsidiaries of the Registrant
State or Other
Jurisdiction of
Name of Incorporation Percent
Subsidiary or Organization Owned
- ----------------------------- ---------------- -------
<S> <C> <C>
Gear Fit Golf Company California 100
GGI, Inc. Nevada 100
Pacific Golf Holdings, Inc. California 100
Bel Air - Players Group, Inc. California 100
</TABLE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors
for the years ended December 31, 1999 and 1998 F-1
Consolidated Balance Sheets at December 31, 1999 and 1998 F-2
Consolidated Statements of Operations
for the years ended December 31, 1999 and 1998 F-3
Consolidated Statements of Shareholders Equity
for the years ended December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
GolfGear International, Inc.
We have audited the accompanying consolidated balance sheets of GolfGear
International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GolfGear International, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the consolidated results of their operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.
HOLLANDER, LUMER & CO.
Los Angeles, California
March 17, 2000
<PAGE>
<TABLE>
<CAPTION>
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 793,262 $ 31,771
Accounts receivable, net of allowance
for doubtful accounts of $40,000 in 1999,
and $42,000 in 1998 446,214 280,241
Inventories 452,272 424,420
Prepaid expenses 20,610 6,495
------------ -------------
TOTAL CURRENT ASSETS 1,712,358 742,927
PROPERTY AND EQUIPMENT, NET 122,046 116,967
OTHER ASSETS
Patents and trademarks, net 156,504 173,380
Deposits 23,025 10,126
------------ -------------
TOTAL OTHER ASSETS 179,529 183,506
------------ -------------
$ 2,013,933 $ 1,043,400
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank credit line payable $ 16,020 $ 47,261
Notes payable to shareholders 35,434 72,397
Notes payable 70,631 16,203
Accounts payable and accrued expenses 641,498 674,048
Accrued product warranties 36,000 43,904
Accrued interest 12,448 11,753
Accrued officer's compensation 124,000 65,000
------------ -------------
TOTAL CURRENT LIABILITIES 936,031 930,566
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value;
authorized - 10,000,000 shares:
Series A Senior Convertible Stock:
issued and outstanding - 216,626 shares
(stated value - $9.50 per share) 217
Common stock, $.001 par value; authorized-
50,000,000 shares; issued and outstanding-
12,816,348 shares in 1999, and 12,497,027
shares in 1998 12,816 12,497
Additional paid-in capital 7,981,695 5,633,949
Accumulated deficit (6,916,826) (5,533,612)
------------ -------------
TOTAL SHAREHOLDERS' EQUITY 1,077,902 112,834
------------ -------------
$ 2,013,933 $ 1,043,400
============ =============
See accompanying Notes to Consolidated Financial Statements
<PAGE>
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
December 31,
1999 1998
------------ -------------
SALES $ 2,302,407 $ 1,244,119
COST OF GOODS SOLD 1,379,855 937,734
------------ -------------
GROSS PROFIT 922,552 306,385
------------ -------------
EXPENSES
Selling and marketing 573,933 657,853
Tour and pro contracts 191,315 479,561
Infomercial 503,567
Write off of Rugg assets 135,000
Bad debt expense 240,069 39,448
General and administrative 1,177,268 1,130,242
Depreciation and amortization 51,898 56,659
Interest expense 55,701 37,213
Interest income (6,633) (2,988)
------------ -------------
TOTAL EXPENSES 2,283,551 3,036,555
------------ -------------
NET LOSS $(1,360,999) $( 2,730,170)
============ =============
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
Net loss $(1,360,999) $( 2,730,170)
Less dividends on preferred stock (22,215)
------------ -------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(1,383,214) $ (2,730,170
============ =============
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0,11) $ (0,24)
============ =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 12,573,152 11,558,995
============ =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ ----------
PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 10,250,876 $ 10,251 $ 3,260,132 $(2,803,442) $ 466,941
CONVERSION OF ACCOUNTS PAYABLE
INTO COMMON STOCK 100,000 100 99,900 100,000
ISSUANCE OF COMMON STOCK FOR SERVICES 256,033 256 275,379 275,635
ISSUANCE OF COMMON STOCK FOR ACQUISITION 125,000 125 124,875 125,000
FAIR VALUE OF OPTIONS AND WARRANTS ISSUED
TO NON-EMPLOYEES 449,128 449,128
ISSUANCE OF COMMON STOCK IN PRIVATE
PLACEMENTS, NET 1,747,500 1,747 1,413,303 1,415,050
EXERCISE OF STOCK OPTIONS 17,618 18 11,232 11,250
NET LOSS FOR THE YEAR (2,730,170) (2,730,170)
------- ------- ------------ -------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1998 12,497,027 12,497 5,633,949 (5,533,612) 112,834
ISSUANCE OF COMMON STOCK FOR SERVICES 33,500 33 22,352 22,385
ISSUANCE OF COMMON STOCK IN PRIVATE
PLACEMENTS, NET 66,667 67 49,933 50,000
ISSUANCE OF PREFERRED STOCK IN PRIVATE
PLACEMENT, NET 210,526 211 1,785,241 1,785,452
ISSUANCE OF STOCK RELATED TO ACQUISITION
OF BEL AIR INVENTORY 3,761 4 275,000 275 168,655 168,934
PREFERRED STOCK DIVIDEND 2,339 2 22,213 (22,215)
FAIR VALUE OF OPTIONS AND WARRANTS
ISSUED TO NON-EMPLOYEES 299,296 299,296
ADJUST SHARES OUTSTANDING (55,846) (56) 56
NET LOSS FOR THE YEAR (1,360,999) (1,360,999)
------- ------- ------------ -------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1999 216,626 $ 217 12,816,348 $ 12,816 $ 7,981,695 $(6,916,826) $ 1,077,902
======= ======= ============ ======== ========== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GOLFGEAR INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
----------------------------
1999 1998
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,360,999) $(2,730,170)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 51,898 56,659
Provision for bad debts 240,069 39,448
Common stock issued for services 22,385 275,635
Common stock issued for assets written off 125,000
Fair value of options and warrants
issued to non-employees 299,296 449,128
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (406,042) (243,080)
Inventories 141,082 (142,624)
Prepaid expenses (14,115) 61,302
Deposits (12,899) (3,226)
Increase (decrease) in
Accounts payable 37,372 582,211
Accrued product warranties (7,904) (4,164)
Accrued interest 695 5,994
Accrued officer's compensation 59,000 15,000
NET CASH USED IN
OPERATING ACTIVITIES
$ (950,162) $(1,512,887)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (40,101) (88,654)
Additions to patents and trademarks (16,355)
-------------- ------------
NET CASH USED IN
INVESTING ACTIVITIES $ (40,101) $ (105,009)
-------------- ------------
<PAGE>
GOLFGEAR INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended
December 31,
----------------------------
1999 1998
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of equity securities in private
placements, net $ 1,835,452 $ 1,415,050
Decrease in notes payable to shareholders (36,963)
Exercise of stock options 11,250
Increase (decrease) in bank credit line (31,241) 4,769
Proceeds from short-term borrowings 50,000 65,000
Repayments on short-term borrowings (65,494) (34,797)
-------------- ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,751,754 1,461,272
-------------- ------------
NET INCREASE (DECREASE) IN CASH 761,491 (156,624)
CASH, BEGINNING OF PERIOD 31,771 188,395
-------------- ------------
CASH, END OF PERIOD $ 793,262 $ 31,771
============== ============
CASH PAID FOR:
Interest $ 40,406 $ 16,553
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of accounts payable
into common stock $ 100,000
Issuance of preferred shares for payment of dividend $ 22,215
Common stock issued for inventory $ 168,934
Conversion of accounts payable into
notes payable $ 69,922
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - GolfGear International, Inc. and its subsidiaries
----------------------
(collectively, "GolfGear" or the "Company") designs, develops and markets
golf clubs and related golf products.
GolfGear, formerly Harry Hurst, Jr., Inc. ("HHI") was incorporated under
the laws of the State of Nevada on October 9,1997. The Company is the
successor entity resulting from a December 5, 1997 reorganization between
GolfGear International, Inc. ("GGI"), which has been active in the golf
business since 1990, and HHI, a non-operating public shell corporation. HHI
changed its name to GolfGear International, Inc., and GGI changed its name
to GGI, Inc. and remains a wholly-owned subsidiary of the Company. Each
share of Common Stock of GGI was exchanged for 3.5235 shares of common
stock of HHI. The shareholders of GGI, constituting 90% of the then
outstanding common stock, became the controlling shareholders of the
Company.
For accounting purposes, the acquisition of GGI by HHI has been treated as
a reverse acquisition of GGI with GGI considered the acquirer. The
historical financial statements prior to December 5, 1997 are those of GGI.
All information in the accompanying financial statements has been
retroactively restated to reflect this transaction.
Segment and Geographic Information - The Company operates in one business
-----------------------------------
segment. Sales are to customers in both the United States and the Far East.
Sales for the fiscal year ended December 31, 1998 to customers in the
United States and the Far East were $1,203,309 (96.7%) and $40,810 (3.3%),
respectively. Sales for the fiscal year ended December 31, 1999 to
customers in the United States and the Far East were $1,800,805 (78.2%) and
$501,602 (21.8%), respectively.
Principles of Consolidation - The consolidated financial statements include
---------------------------
the accounts of the Company, its wholly-owned subsidiary, GGI, Inc., and
GGI, Inc.'s wholly-owned subsidiaries, GearFit Golf Company and Pacific
Golf Holdings, Inc. All significant inter-company transactions and balances
have been eliminated in consolidation.
Use of Estimates - 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.
Inventories. Inventories are stated at lower of cost (average) or market.
-----------
Property and Equipment - Property and equipment are stated at cost.
------------------------
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets which range from five to seven years. Leasehold
improvements are amortized on the straight-line method over the term of the
lease or the useful life of the asset, whichever is shorter.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the assets non-discounted expected cash flows
are not sufficient to recover its carry amount. The Company measures an
impairment loss by comparing the fair value of the asset to its carrying
amount. Fair value of an asset is calculated as the present value of
expected future cash flows.
Patents and Trademarks - Patents and trademarks are being amortized on the
----------------------
straight-line method over a seventeen and ten year life, respectively.
Revenue Recognition - Revenue is recognized when products are shipped to
--------------------
customers. The Company generally provides a lifetime warranty against
defects. The Company makes a provision for warranty costs in the period of
sale. The Company periodically reviews the adequacy of the accrued product
warranties.
Stock-Based Compensation - The Company periodically issues common stock
------------------------
options and common stock purchase warrants to employees and non-employees
in non-capital raising transactions for services rendered and to be
rendered, and as financing costs.
The Company adopted Statement of Financial Accounting Standards ("SFAS) No.
123, "Accounting for Stock-Based Compensation", which establishes a fair
value method of accounting for stock-based compensation plans.
<PAGE>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provisions of SFAS No. 123 allow companies to either expense the
estimated fair value of stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", but to disclose the pro
forma effect on net income (loss) and net income (loss) per share had the
fair value of the stock options been exercised. The Company has elected to
continue to account for stock-based compensation plans utilizing the
intrinsic value method. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's
common stock at the date of grant above the amount an employee must pay to
acquire the common stock.
In accordance with SFAS No. 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on
the value or the award and is recognized over the vesting period. The value
of the stock-based award is determined using the Black-Scholes pricing
model whereby compensation cost is the excess of the fair value of the
award as determined by the pricing model at the grant date or other
measurement date above the amount an employee must pay to acquire the
stock. The resulting amount is charged to expense on the straight-line
basis over the period in which the Company expects to receive benefit,
which is generally the vesting period. Beginning in 1999, stock option
issued to non-employee directors at fair market value are accounted for
under the intrinsic value method. Prior to 1999, such options were
accounted for as an expense at estimated fair market value.
With respect to shares of common stock issued for services rendered or to
be rendered, or for financing costs, such shares are valued based on the
fair market price on the transaction date, adjusted for factors such as
trading restrictions, registration rights, trading volume and market
liquidity, which generally results in a reduction ranging from 25% to 33%
to the fair market price at the transaction date.
Income Taxes - The Company accounts for income taxes utilizing the assets
------------
and liability approach, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the basis of assets and liabilities for
financial reporting purposes and tax purposes.
Net Loss Per Common Share - Effective December 31, 1997. the Company
--------------------------
adopted Statement of Financial Accounting Standards ("SFAS") No. 128.
"Earnings Per Share;" which establishes standards for computing and
presenting earnings per share. SFAS No. 128 replaces the presentation of
primary earnings per share and fully diluted earnings per share with basic
earnings per share and diluted earnings per share, respectively. Basic
earnings per share excludes the dilutive effects of options and convertible
securities, if any, and is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed
assuming the exercise or conversion of common equivalent shares, if
dilutive, consisting of unissued shares under stock options, warrants and
debt instruments. In accordance with SFAS No. 128, all prior periods
presented have been restated to conform to the new presentation.
At December 31, 1999 and 1998, potential dilutive securities representing
4,079,582 shares and 3,045,508 shares of common stock, respectively, were
not included in the earnings per share calculation since their effect would
be anti-dilutive. At December 31, 1999, potential dilutive securities
consisted of 1,979,903 outstanding stock options and 2,099,679 outstanding
common stock purchase warrants. At December 31. 1998, potential dilutive
securities consisted of 1,359,904 outstanding stock options and 1,685,604
outstanding common stock purchase warrants.
Basic and diluted earnings per share are the same for all periods
presented.
Concentration of Credit Risk - The Company maintains its accounts with a
----------------------------
financial institution with a high credit rating. As of December 31, 1999,
the Company had an account in one bank with a balance of $746,685, which
exceeded the Federally insured limit.
Allowance for Doubtful Accounts - The Company makes periodic evaluations of
------------------------------
the creditworthiness of its customers and generally does not require
collateral. As of the balance sheet dates presented, management has
determined that an adequate provision has been made for doubtful accounts.
Dependence on Major Suppliers - The Company is dependent on three major
-------------------------------
suppliers for the production of golf club heads and tooling used to produce
the heads. However, management believes that any risk is mitigate due to
the large number of alternative suppliers.
Major Customers - Four customers accounted for approximately 68% of total
--------------
sales in 1999. Two customers accounted for approximately 49% of total sales
in 1998.
Reclassifications - Certain prior period balances have been reclassified to
-----------------
conform with current years presentation.
<PAGE>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Comprehensive Income - A statement of comprehensive income is not presented
--------------------
as the Company has no items of comprehensive income for the periods
presented.
Working Capital Requirements - 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 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 level of operations, as it has in previous
periods, to correlate its cash flows to its available cash resources.
2. ACQUISITIONS
Bel Air Golf Companies - On October 1, 1999, the Company entered into an
----------------------
agreement to acquire all of the operating assets of Bel Air Golf Companies,
including the "Bel Air Golf" and "Players Golf" trade names. The Bel Air
Golf Companies were acquired by new management in 1997 and had consolidated
unaudited revenues of approximately $2,000,000 for the year ended December
31, 1998. Players Golf offers a full line of junior golf clubs, and Bel Air
Golf is known primarily for golf glove products that offer both value and
quality. Bel Air Golf and Players Golf will be operated as a separate
division of Golf Gear.
In consideration for acquiring these assets, the Company assumed
liabilities of approximately $50,000 and issued 400,000 shares of its
restricted common stock. The Company also agreed to issue 255,000 warrants
exercisable at $1.00 per share for a period of six months from closing,
100,000 warrants exercisable at $1.00 per share for a period of one year
from closing, and 100,000 warrants exercisable at $1.00 per share, 100,000
warrants exercisable at $2.00 per share and $100,000 warrants exercisable
at $3.00 per share, vesting and exercisable only if net revenues from Bel
Air Golf and Players Golf reach $1,500,000, $2,000,000 and $2,500,000 in
2000, 2001, 2002, respectively. The Company issued 250,000 of the 400,000
shares on November 29, 1999 as an advance, in order to be able to operate
the Bel Air Golf Companies on an interim basis. The Company also issued
10% of the securities described above as a finder's fee with respect to
this transaction. This transaction closed on April 11, 2000.
Douglas Rugg - On May 16, 1998, the Company entered into an agreement for
------------
the purchase of assets with Douglas Rugg for the acquisition of certain
assets. This agreement covers the purchase of: (i) all rights and interest
in and to the design of certain golf bags and a golf bag carrying case
which includes technology know-how, and all documentation thereto; (ii) the
design of all related eye-wear; (iii) the name "Executive Trail Blazer Golf
Bag;" (iv) all books, records and customer and supplier lists used in the
business; (v) all rights and interest in and to patents, trademarks, rights
under contracts, leases, and claims or causes of action related to these
assets or the business; (vi) all inventory relating to golf bags and
sunglasses; and (vii) all machinery and equipment relating to the assembly
and/or shipping of the inventory.
In consideration for purchasing these assets, the Company paid the
following: (i) the sum of $10,000; (ii) 125,000 shares of the Company's
restricted common stock (valued at $1.00 per share);l and (iii) a three
percent royalty on gross sales of all the merchandise and products covered
by this agreement. In connection with this acquisition, Mr. Rugg agreed to
furnishing certain consulting services to the Company. The acquisition was
completed on November 11, 1998 and the Company wrote off the assets
acquired as of December 31, 1998. No royalties have been paid under this
agreement.
3. INVENTORIES
Inventories consisted of the following at December 31, 1999 and 1998:
December 31,
------------------------
1999 1998
------------ ----------
Components parts $ 296,847 $ 274,319
Finished goods 155,425 150,101
$ 452,272 $ 424,420
<PAGE>
<TABLE>
<CAPTION>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31. 1999 and 1998:
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Machinery and equipment $ 5,850 $ 5,850
Office equipment 12,909 6,056
Computers and software 51,110 50,111
Furniture and fixtures 40,295 40,295
Automobile 41,143 7,818
Trade show booths 57,499 64,824
Tooling 170,876 164,626
Leasehold improvement 1,913 1,913
381,595 341,493
---------- ----------
Less accumulated depreciation and
amortization 259,549 224,526
---------- ----------
$ 122,046 $ 116,967
========== ==========
</TABLE>
5. BANK CREDIT LINE PAYABLE
At December 31, 1998, the Company had an unsecured $70,000 bank line of
credit with Wells Fargo Bank. The line of credit matured in November 1999,
and was renewed with a maturity date of November 2000. Interest is payable
monthly at the rate of prime plus 3% (12.75% at December 31, 1999).
Outstanding borrowings at December 31, 1999 and 1998 were $16,020 and
$47,261, respectively. The line is personally guaranteed by the Company's
President and Chief Executive Officer.
6. NOTES PAYABLE
The Company had notes payable to shareholders totaling $35,434 and $72,397
as of December 31, 1999 and 1998, respectively. The notes bear interest at
10% and are payable on demand.
In October 1997, a certain creditor converted the balance of its account
payable into a note payable in the amount of $25,000. As of December 31,
1998, the note had an outstanding balance of $16,203, which was paid-off in
1999.
On January 8, 1999, the Company borrowed $50,000 from a third-party at 9%
interest, due on April 8, 1999. In connection therewith, the Company issued
a warrant to purchase 20,000 shares of common stock exercisable at $1.06
per share through January 8, 2004. This note was paid off in October 1999.
On February 3, 1999, the Company borrowed $10.000 from a third party at 9%
interest, due on February 3, 2000. At December 31, 1999, the original
balance remained outstanding.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases its facilities and various equipment
----------------
under non-cancelable operating leases. Future minimum lease payments
required under non-cancelable operating leases with initial terms in excess
of one year were as follows at December 31, 1999:
Year Ending
December 31,
------------------
2000 $ 69,630
2001 77,630
2002 78,990
2003 8,732
----------
$ 234,982
==========
<PAGE>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rent expense under operating leases included in the financial statements
for the years ended December 31, 1999 and 1998 were $43,115 and $40,550,
respectively.
Employment Agreements - The Company has entered into an employment
----------------------
agreement with Donald A. Anderson, its president and major shareholder,
dated July 1, 1998, which expires on December 31, 2002. This agreement has
an automatic renewal provision which allows renewal for a one year period
on the same terms and conditions unless either party gives notice to the
other party of at least ninety days prior to the expiration of the term of
their intention to renew the agreement. The agreement may only be
terminated by the Company if there is a willful breach or habitual neglect
of duties relating to performing terms of the agreement or there are acts
of dishonesty, fraud and misrepresentation. The agreement provides for a
base salary of $90,000 per year and an automobile expense allowance of $750
per month. During 1999, the Company also paid $3,822 for health insurance
($3,924 in 1998) and $2,388 for life insurance ($2,546 in 1998) for Mr.
Anderson.
In addition to the fixed salary, Mr. Anderson is to receive under the terms
of this agreement a sum equal to five percent (5%) of the net earnings, as
defined, of the Company for each fiscal year (provided, however, such
additional compensation for any fiscal year will not exceed $200,000).
Since the date of this agreement, there have been no net earnings upon
which to pay such additional amount.
Corporate Development Agreement - In October 1997, the Company entered into
------------------------------
a Corporate Development Agreement with The Michelson Group, Inc.
("Michelson") whereby Michelson would perform certain corporate advisory
services. During 1998, the Company issued 160,000 shares of its common
stock pursuant to and in full satisfaction of this agreement.
Consulting Agreement - On October 1, 1998, the Company executed a
--------------------
consulting agreement with Sports Opportunities International, a South
Carolina corporation, owned by Parker Smith, a director of the Company. The
agreement required a payment of $40,000 a year commencing on January 1,
1999. The agreement also granted stock options entitling the purchase of
50,000 shares of common stock at $2.00 per shares, 20,000 of which vested
upon execution of the agreement; 15,000 of which vest six months after
execution of the agreement and the remaining 15,000 of which vest one year
after execution of the agreement. The consulting agreement also provided
for a 0.25% royalty to be paid for each golf club sold through companies or
distributors introduced to the Company by Mr. Smith. The agreement had a
term of one year, and expired without being renewed on October 19, 1999.
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 contract between
the parties dated January 1, 1998. The Company and Mr. Alliss are in
discussions regarding the validityof the claims and the actual amount of
damages, if any. 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 flows.
8. LICENSE AGREEMENTS
On August 12, 1998, the Company executed a License Agreement with
Confidence Golf, Inc., a California corporation formerly owned by Robert J.
Williams, who is a former Officer and a Director, and currently a major
shareholder of the Company. Confidence Golf, Inc. was purchased by Family
Golf Centers, Inc. in December 1997. Pursuant to the License Agreement, the
Company has licensed to Confidence Golf, Inc. a non-exclusive worldwide
right to utilize the Company's patented forged insert technology in the
manufacture and sale of golf clubs. The License Agreement provides for
royalties to be paid at the rate of $2.00 per iron and $2.50 per wood for
each golf club, component made, used or sold worldwide. The License
Agreement expires upon termination of all patents and patent applications,
or in the event that royalty payments are not timely made or there is a
material breach of this agreement.
On November 19, 1998, the Company entered into a similar licensing
agreement with Wilson Sporting Goods Company to also use the Company's
forged insert technology. Under the terms of this agreement, Wilson agreed
to pay royalties as follows: (a) for irons: $1.00 per club for the first
250,000 sold, $0.75 per club for the next 250,000 up to 500,000, and $0.50
for over 500,000, and (b) for wood: $1.00 per club for the first 500,000
and $0.75 per club over 500,000.
On November 22, 1999, the Company entered into a licensing agreement with
PowerBilt Golf, a division of Hillerich and Bradsby Co. The license
agreement grants PowerBilt Golf the non-exclusive right to utilize
GolfGear's patented insert technology in its product lines in all non-Asian
countries (except for Korea, which is included in the license), including
the United States. The license agreement is for an initial term of five
years, and is renewable at PowerBilt's option for an additional five-year
term.
On September 27, 1999 the Company entered into a Distribution Agreement
With MC Corporation (see Note 11). The agreement grants MC Corporation an
exclusive distribution right for all Golf Gear products in Japan and Asia
excluding South Korea. The initial term of the agreement is five years and
it is renewable thereafter. The agreement contains minimum performance
guarantees on the part of MC Corporation. The agreement also licences to
MC Corporation the right to use the Golf Gear name on apparel, bags, shoes
And other accessories for a six (6) percent royalty based on the price that
the distributor pays for such goods.
<PAGE>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS
On June 17, 1997, the Company entered into a Financial Services Agreement
with Bridgewater Capital Corporation ("Bridgewater") whereby Bridgewater
would arrange and help consummate a merger between the Company and a public
shell corporation and also assist the Company to analyze, negotiate and
advise on obtaining equity capital or debt financing. Upon the successful
completion of the$500,000 financing in October 1997, the Company paid
Bridgewater a fee of $60,000 and issued 499,002 shares of the Company's
common stock, representing 4.99% of the post-reorganized public company. In
December 1997, the Company completed a reorganization with Harry Hurst,
Jr., Inc. (see Note 1). The Financial Services Agreement also required that
Bridgewater be paid a consulting fee of $72,000 payable $6,000 monthly,
have the right to appoint one person to the Board of Directors for two
years, and be paid a 10% finders fee and 2% unaccountable expense allowance
on all capital, cash, equity or debt infused into the Company by or through
Bridgewater. This agreement expired in October 1998. During 1998 the
Company paid $6,900 to Bridgewater as a capital raising fee. Mr. Peschong,
a former director of the Company, is an officer and shareholder of
Bridgewater.
On January 27, 1999, the Company executed a letter of understanding with
Bridgewater whereby, among other things, the Company agreed to issue a
promissory note to Bridgewater in the amount of $50,000 due and payable no
later than April 1, 1999 and to issue common stock warrants entitling
Bridgewater to purchase 105,705 shares of common stock at $0.62 per share
which expire October 2002. The agreement to issue the promissory note and
warrants arise out of ostensible obligations in the Financial Services
Agreement. The execution of the letter of understanding was in anticipation
of and contingent upon an expected equity financing which did not
materialize. In the opinion of management, all obligations relating to
these agreements have been recorded on the books of the Company as of
December 31, 1999.
In March 1998, the Company recorded a liability of $65,000 to the spouse of
the Company's President and major shareholder as a finders fee with respect
to a $650,000 equity investment in the Company during 1998. As of December
31, 1999, the balance remaining of the $65,000 obligation was $35,434
($39,000 at December 31, 1998) and is included in notes payable to
shareholders in the accompanying financial statements.
10. INCOME TAXES
As of December 31, 1999, the Company has federal net operating loss
carry-forwards of approximately $4,786,000, which can be used to offset
future taxable income. The utilization of such carryforwards will be
limited by the Internal Revenue Code due to the change in ownership of the
Company. No deferred asset benefit for these operating losses has been
recognized in the financial statements due to the uncertainty as to the
realizability of these in the future periods.
11. SHAREHOLDERS' EQUITY
Preferred Stock - 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, par value $.001, for $2,000,000, which was received in
cash during October 1999. The following fees were paid in connection with
this financing (a) a finders fee in the amount of $200,000, (b) warrants to
purchase 20,000 shares of common stock at $1.00 per share, and (c) 1% of
all royalties to be received by the Company pursuant to a related
Distribution Agreement.
The 210,526 shares of preferred stock are convertible into 2,105,260 shares
of the Company's common stock currently equal to 14.3% of the
post-converted outstanding common stock of the Company. The 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. During
1999 dividends on preferred stock in the amount of $22,215 were paid in the
form of 2.339 additional shares of preferred stock.
Anti-dilution provisions permit the buyer to purchase additional preferred
stock so as to maintain it 14.3% interest in the Company for a period of
five years. Furthermore, additional preferred shares are required to be
issued for no additional consideration in order to maintain the buyer's
14.3% interest in the Company as a result of the Bel Air acquisition
described in Note 2 above. Pursuant to this clause, on November 29, 1999,
3,761 additional shares of preferred stock were issued as a result of the
Bel Air inventory acquisition. Additional preferred shares of stock will
also be issued upon completion of the Bel Air transaction.
Common stock purchase warrants entitling the holder to purchase 330,000
shares of common stock were also issued to the buyer. Such warrants are
exercisable at a price of $1.00 per share for a period of three years.
The Company also executed a Distribution Agreement with the purchaser
granting the purchaser an exclusive right to distribute the Company's
products in Japan for an initial period of five years. Due to the valuation
place upon the preferred stock sold, no accounting value was attributed to
the Distribution Agreement.
<PAGE>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Stock - On June 16, 1999, the Company sold 66,667 shares of its
-------------
common stock to an investor for $50,000 pursuant to an agreement to sell up
to 500,000 shares to that same investor. On August 31. 1999. the agreement
expired with no further sales being made.
During 1998, the Company raised gross proceed of $1,587,500 from private
placements of 1,587,500 shares of its common stock at a price of $1.00 per
share. In connection with these private placements, the Company paid
commissions and fees of $12,450, issued 160,000 shares of common stock
valued at $160,000 for services rendered and issued warrants to purchase
217,000 shares of common stock exercisable at $2.00 per share through March
1, 2001, and warrants to purchase 31,050 shares of common stock exercisable
at $1.20 per share through December 12, 2000.
During 1997, the Company raised gross proceeds of $1.037,500 from private
placements of its common stock that commenced on September 1, 1997 at a
price of $.57 per share and $50,000 from private placements that commenced
on December 12, 1997 at a price of $1.00 per share. In connection with
these private placements, the Company paid commissions and fees of
$101,250, issued 499,002 shares of common stock valued at $282,000 for
services rendered and issued warrants to purchase 1,057,500 shares of
common stock exercisable at $.28 per share through October 1, 2000, and
warrants to purchase 5,000 shares of common stock exercisable at $1.20 per
share through December 29, 2000. Effective February 15, 1999 the Stock and
Warrant Purchase Agreement dated September 1997 with Berkeley Investment
Group Ltd., that originally resulted in the sale of 880,875 shares of its
common stock and 1,057,050 warrants to acquire shares of its common stock
for a total consideration of $500,000 was amended to reflect changes to
registration rights and penalties related thereto. The amendment granted
Berkeley warrants to purchase an additional 105,075 shares of common stock
at $.28 per share which expires in October 2000 in full settlement of
registration related penalty rights.
During 1998, accounts payable in the aggregate amount of $100,000 were
converted into 100,000 shares of the Company's common stock.
During 1998, the Company paid $10,000 in cash and issued 125,000 shares of
its common stock valued at $125,000 for the purchase of a golf accessory
business. (Note.2)
During 1999 and 1998, the Company issued 33,500 shares valued at $22,385
and 256,033 shares valued at $275,635, respectively, for services rendered.
Warrants - During 1999 and 1998, warrants to purchase 59,000 shares of
--------
common stock, and 150,000 shares of common stock, respectively, at prices
ranging from $0.50 to $2.00 per share were issued to non-employees for
services rendered.
During 1999, warrants to purchase 20,000 shares of common stock at $1.06
per share were issued as loan fees.
<PAGE>
Information regarding the Company's warrants is as follows:
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Weighted Aggregate
Shares Average Weighted Exercise
Underlying Exercise Average Price
Options Price Fair Value
----------- --------- ----------- -----------
BALANCE
DECEMBER 31, 1997 1,287,554 0.31 0.48 398,800
Granted 398,050 1.87 2.75 746,260
Canceled --- --- --- ---
Exercised --- --- --- ---
----------- --------- ----------- -----------
BALANCE
DECEMBER 31, 1998 1,685,604 0.68 1.02 1,145,060
Granted 514,075 0.94 0.64 485,121
Canceled (100,000) 2.00 0.76 (200,000)
Exercised --- --- --- ---
----------- --------- ----------- -----------
BALANCE
DECEMBER 31, 1999 2,099,679 $ 0.68 $ 0.94 $1,430,181
=========== ========= =========== ===========
The following table summarizes the information about warrants outstanding
at December 31, 1999:
Shares Weighted Average
Underlying Remaining
Exercise Price Warrants Contractual Life
-------------- --------- ----------------
$ 0.28 1,303,065 2.7 years
$ 0.50 9,000 2 years
$ 0.62 84,564 2.2 years
$ 1.00 330,000 2.7 years
$ 1.06 20,000 4 years
$ 1.20 36,050 3 years
$ 1.75 100,000 .5 years
$ 2.00 217,000 1.2 years
---------
2,099,679
=========
The Company accounted for warrants granted to non-employees in accordance
with SFAS No. 123 which requires non-cash compensation expense be
recognized over the expected period of benefit. During 1999 and 1998, the
Company recognized non-cash compensation expense of $53,770 and $76,000 for
warrants to purchase 79,000 shares and 150,000 shares, respectively, of the
Company's common stock. The remaining 435,075 warrants in 1999 and 248,050
warrants in 1998 were issued in connection with the sale of common stock.
The offering costs associated with these warrants were netted against the
proceeds from the sale of the Company's common stock.
Stock Options - in October of 1997, the Board of Directors of the Company
--------------
approved a stock option plan entitled "GolfGear International, Inc. 1997
Stock Option Plan" ("Plan"). This Plan is intended to allow designated
officers and employees and certain non-employees of the Company to receive
stock options to purchase the Company's common stock and to receive grants
of common stock subject to certain restrictions as more fully described in
the Plan. The Plan has reserved 2,642,625 shares of the Company's common
stock, subject to adjustments, that may be issued under the Plan.
The Plan provides for the granting to employees (including employees who
are also directors and officers) of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting of non-statutory
stock options to directors, employees and consultants. The plan is
currently administered by the Board of Directors of the Company.
<PAGE>
GOLFGEAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The exercise price per share of incentive stock options granted under the
Plan must be at least equal to the fair market value of the common stock on
the date of the grant. With respect to any participant who owns shares
representing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive or
non-statutory stock options must be equal to at least 110% of the fair
market value of the grant date, and the maximum term of the option must not
exceed five years. Upon a merger of the Company, the option outstanding
under the Plan will terminate unless assumed or substituted be the
successor corporation. As of December 31, 1999, 1,242,085 options have been
granted under the Plan, including 502,350 options granted to the Company's
President as follows: 352,350 during 1997 that are exercisable at $0.62 and
expire in October 2002, and 150,000 during 1999 that are exercisable at
$0.275 and expire in August 2001.
Information regarding the Company's stock option is as follows:
Weighted Aggregate
Shares Average Weighted Exercise
Underlying Exercise Average Price
Options Price Fair Value
----------- --------- ----------- ----------
BALANCE
DECEMBER 31, 1997 1,137,522 0.62 0.43 702,500
Granted 240,000 3.78 2.35 907,500
Canceled --- - - -
Exercised (17,618) 0.64 - (11,250)
----------- --------- ----------- ----------
BALANCE
DECEMBER 31, 1998 1,359,904 1.18 0.78 1,598,750
Granted 620,000 0.32 0.14 195,625
Canceled --- --- --- ---
Exercised --- --- --- ---
----------- --------- ----------- ----------
BALANCE
DECEMBER 31, 1999 1,979,904 $ 0.91 $ 0.58 1,794,375
=========== ========= =========== ==========
The following table summarizes the information about stock option outstanding at
December 31, 1999:
Shares Weighted Average
Underlying Remaining
Exercise Price Warrants Contractual Life
-------------- --------- ----------------
$ 0.25 375,000 1.7 years
$ 0.275 225,000 1.7 years
$ 0.57 704,700 2.7 years
$ 0.62 352,350 2.7 years
$ 0.64 52,854 1.7 years
$ 2.00 70,000 1 year
$ 3.75 10,000 3 years
$ 4.25 190,000 1 year
---------
1,979,904
=========
The Company accounted for stock options granted to employees, officers and
directors under APB Opinion No. 25. "Accounting for Stock Issued to
Employees," under which no compensation cost has been recognized. Options
granted to non-employee directors are accounted for in accordance with SFAS
No. 123. Had the compensation cost for the options been determined based
upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss and basic and diluted
loss per share in 1999 would have been increased by approximately $61,500
and $.005 per share, respectively ($48,000 and $0.04 per share,
respectively, in 1998).
The fair value of the warrants and option granted is estimated on the date
of grant using the Black-Scholes option pricing model with following
weighted average assumptions: dividend yield of 0%, volatility of 100%,
risk-free interest rate of 6.7% and an expected life of five years.
The effect of applying SFAS No. 123 in this pro forma disclosure is not
indicative of future results.
12. INFOMERCIAL COSTS
During 1998, the Company incurred aggregate costs of $503,567 with respect
to the preparation and filming of an informercial at December 31, 1998,
management reviewed the Company's informercial marketing program and
determined that it was unlikely to be successful and, accordingly, such
costs were charged to operations during 1998.
<PAGE>
