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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
AMENDMENT No. 2 to the
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Form 10-SB
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GENERAL FORM OF REGISTRATION OF THE SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR (g) OF THE SECURITIES ACT OF 1934
Commission File Number: 0-28707
CARBITE GOLF, INC.
(Name of Small Business Issuer in its charter)
British Columbia, Canada 33-0770893
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9985 HUENNEKENS STREET
SAN DIEGO, CA 92121
(Address of principal executive offices)
Issuer's telephone number (858) 625-0065
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT: None
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
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This Form 10-SB contains "Forward-looking statements" about our plans,
strategies, objectives, expectations, intentions, anticipated growth, and
possible acquisitions. Other statements that are not historical facts may also
be forward-looking statements. When used in this report, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions are generally intended to identify forward-looking statements. These
statements are only predictions and actual results could differ materially .
Factors that might cause such a difference are discussed throughout this
form 10-SB including the section "Risk Factors" on pages 13 to 18. Any forward-
looking statement speaks only as of the date we made the statements and we do
not undertake to update the disclosures contained in this document or reflect
events or circumstances that occur subsequently or the occurrence of
unanticipated events.
ITEM 1. DESCRIPTION OF BUSINESS
History and Development of the Company
Carbite Golf, Inc., through its wholly-owned subsidiary Carbite, Inc.,
develops, manufactures, and sells golf equipment. Our primary products are
putters and wedges, both of which incorporate our patent-protected technology.
We also offer irons and wood sets and distribute some products manufactured by
others. We market and sell our products through a diverse combination of (i)
wholesale sales to on-course and off-course golf retail shops and selected
sporting goods retailers; and (ii) direct response sales to consumers through
television infomercials, direct mail, telemarketing and the internet.
The Company was incorporated in 1985 in British Columbia, Canada under the
name Q Data Systems, Inc. After a public offering in Canada in 1986, our stock
has been publicly traded on the Canadian Venture Exchange (previously Vancouver
Stock Exchange) since 1986. From 1985 to 1996, the Company was involved in a
variety of non-golf businesses, including electronic devices and an automobile
dealership. In 1991, the name was changed to Consolidated Q Data Systems, Inc.
In September, 1997, we entered the golf business when we completed the
acquisition of (i) Carbite, Inc., which had developed a line of wedges and other
golf clubs using patented powder metallurgy technology; and (ii) Advanced Golf
Systems, Inc. which was Carbite's joint venture partner in a television
infomercial for ViperBite clubs. In connection with these acquisitions, we
changed our name to Carbite Golf, Inc., effective January 4, 1996.
By December 31, 1998, our only assets were all the stock in Carbite, Inc.
and Advanced Golf Systems. Since Advanced Golf's only asset is its joint venture
with Carbite, it is considered a discontinued operation and will be formally
dissolved by year end 2000.
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Proprietary Technology Applied to Golf Clubs
Our patented bi-metal technology gives us the ability to produce products
which we believe have demonstrable benefits over competing products.
Dual Density
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Our technology allows us to fabricate and join dissimilar metals with
different densities into one club head. This gives us the ability to maximize
heel-toe weighting without any loss of structural integrity. In our Polar
Balanced putters, for example, we combine highly dense tungsten at the extreme
heel and toe with lightweight aluminum in the center section. Our patented
process creates a molecular bonding of these materials into an integrated
structure such that the tungsten heel and toe pieces become a functional part of
the club head. We believe this is superior to other mechanical techniques which
attempt to apply "stick-on" weights to the heel and toe. The net effect of this
extreme heel-toe weighting is a bigger sweet spot; the performance impact is
that off-center hits will perform better.
High Friction Inserts
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Our insert technology permits the molecular bonding of tungsten carbide and
dissimilar particles onto a bronze face plate to form a durable roughened
striking surface. On wedges, this insert improves the ability of all players to
spin the ball and to control their shots. On putters, this insert allows for a
putt to start off in a straighter course. Our inaugural insert product was the
CheckMate wedge in 1992 and was later extended to other wedges, including the
the Tour Insert Wedge introduced in 1998 and to certain models of the Polar
Balanced Putters.
Surface Technology and Plating
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We have also developed a surface coating process which attaches hard
particles to the striking surface by way of a flame spray. This coating has
performance benefits similar to the insert, but is less expensive to
manufacture. This technology was first used on the ViperBite wedge introduced in
mid-1995 and later expanded to ViperBite iron sets. We also used this process on
our Carbite Gear Effect Metal Woods (1-3-4-5-7-9) which combines surface coating
with a keel-shaped sole and offset head for an easy-to-hit alternative to the
long iron.
Products
Our products are all technically advanced and high quality. The product
line extends to all levels of play (from beginners to professionals) and a broad
range of retail price points ($100 - $200 for putters and wedges). Through 1999,
substantially all our products were sold under the Carbite brand name.
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The following table sets forth the contribution to net sales attributable
to our product groups for the periods indicated:
Year Ended December 31,
1999 1998
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Putters $15,826,820 85.5% $12,354,328 79%
Woods $ 557,327 3.0% $ 1,876,607 12%
Wedges $ 1,758,536 9.5% $ 1,094,687 7%
Other $ 370,218 2.0% $ 312,768 2%
Net Sales $18,510,901 100% $15,638,390 100%
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Polar Balanced Putters
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In the Polar Balanced Putter, a substantial portion of the total putter-
head weight is strategically placed at the toe and heel. This technology is
designed to reduce club head rotation at impact, even on off-center hits. The
Polar Balanced series of putters are designed to have a higher moment of inertia
than most conventionally shaped putters which we believe makes them more
accurate and forgiving than other putters.
Polar Balanced Putters are available in the Z series and the D series. The
Z series has six models (ZG, ZH, ZI, ZM, ZP and ZL), all with steel or aluminum
shafts. The Z putters have tungsten weights in the extreme heel and toe
molecularly bonded to an ultra light center section of aluminum. The ZG and ZH
also incorporate our original bronze tungsten-carbide face insert. The D series
has seven models (DB, DC, DD, DE, DF, DG, and DH). They are stainless steel with
tungsten weights encapsulated in the heel and toe and are offered as a lower
price point complement to the Z series.
Gear Effect Metal Woods
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Gear Effect Metal Woods are designed to impart proper spin on the ball at
the point of impact that keeps it working to the center of the fairway. A
mis-hit towards the toe will generally move back to the intended target line. We
believe this feature helps to ensure more consistent directional control instead
of slices or hooks. The exclusive high friction club face grips the ball at
impact. The offset head is designed to prevent slices by keeping the hands ahead
of the ball at impact. The lightweight grip and shaft are designed to provide
for greater club head speed for increased distance. A radiused keel-shaped sole
is designed to pick the ball cleanly from the tightest lies to the deepest
rough. Gear Effect Metal Woods are available in Driver, 3 Wood, 4 Wood, 5 Wood,
7 Wood and 9 Wood, all in graphite shafts.
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Tour Insert Wedges
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The Tour Insert Wedge is our current wedge product which incorporates the
patented high-friction insert. The insert blends powdered soft bronze with
diamond and tungsten carbide particles designed to deliver extended wear and
coefficient of friction. This technology was designed to provide performance
through spin control so the ball holds the green from any approach shot. Tour
Insert Wedges are available in three loft configurations (52E Approach, 56E Sand
and 60E Lob) with steel or graphite shafts. We are also in development on a
wedge product which will incorporate the heel-toe weighting of the Polar
Balanced Putters.
Tungsten Tour Irons
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Tungsten Tour Irons are designed to bias the weight toward the heel or toe
to help square the club face at impact. Unique weighted inserts made from a
blend of 70% copper and 30% tungsten are designed to modify the club handling
with the goal of reducing hooks and slices. For the long irons, the weighting is
moved toward the heel. For shorter clubs, the weight is shifted toward the toe.
These irons also feature a progressive offset with a mid-size cavity back head.
Tungsten Tour Irons are available in full sets of 3-Iron through Pitching Wedge,
in graphite or steel shaft.
Team Daiwa
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In September 1999, we acquired the rights to sell Daiwa products in the
United States. Initially, we will introduce Team Daiwa bags and gloves to green
grass and off course accounts. At December 31, 1999, this program was still in
development.
Product Design and Development
We believe that the development of new products and the enhancement of
current product lines is necessary for our growth and success. Our research and
development expenses for 1999 and 1998 were $560,616 and $345,000, respectively.
We intend to continue to invest in R&D and product development in the future.
Sales and Marketing
We sell our products through a variety of trade channels and support these
sales through a combination of diverse marketing vehicles.
Retail Sales. We sell primarily to U.S. retailers. To generate retailer
loyalty and maintain a high quality reputation, we do not currently sell to
price sensitive general discount warehouses or membership chains. In 1999 and
1998, sales to retailers accounted for approximately 69% and 46% of total sales.
Retail accounts are handled by a national network of independent sales
representatives supported by our executive office and a telemarketing team of 12
employees in San Diego. At
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December 31, 1999, we had 32 independent sales representatives who receive a
commission on qualifying sales and are free to sell for other golf equipment
companies.
All product orders from retailers and other customers are subject to
cancellation or rescheduling by the customer prior to shipment with limited or
no penalties. While we believe our relationships with customers is satisfactory,
there can be no assurance we will be able to maintain such relationships in the
future.
International Sales. We market our products outside the United States
through independent distributors. The primary foreign market is Japan but we
also sell to Korea, United Kingdom, Germany, Sweden, Puerto Rico and the
Philippines. International sales accounted for 10% and 6% of our net sales for
1999 and 1998.
Our primary foreign distributor is a United States company, which sells the
Polar Balanced putter and other products through infomercials in Japan. Sales to
this distributor were approximately $1,744,668 (9.4% of overall net sales) for
1999 and approximately $1,122,993 (9% of overall net sales) for 1998.
Customer Service Support. We believe that superior customer service can
significantly enhance our marketing efforts. We maintain an in-house customer
service department for both wholesale and direct consumer trade and a 24-hour
7-day-a-week telemarketing company answers customer calls generated by our
infomercials.
Advertising and Promotion. We promote our products through a cost-
effective combination of public relations, promotion, print advertising, and
printed sales materials which invoke the theme of a "material advantage" through
technology. We have avoided general image advertising (in television or print),
choosing instead to focus the marketing budget on direct response advertising
which has a more predictable impact on sales and can be a cost-effective way to
simultaneously build brand name recognition, communicate a product story, and
sell product. We regularly place direct response advertisements in national
print publications such as Golf Digest and Golf World and has used television
infomercials for specific products.
Infomercials. We have successfully used television infomercials to launch
new products. The ViperBite in 1995, the Gyroseven utility wood in 1997, and
the Polar Balanced Putter in 1998 were all introduced through infomercials. We
believe that good infomercials can enhance consumer awareness of products, make
immediate sales, and expand the retail customer base.
Direct Response. In addition to direct response advertising, we pursue
direct consumer sales with sophisticated direct mail and telemarketing programs,
spearheaded by the Company's in-house telemarketing department in San Diego.
Since most direct response sales are made by credit card, we can secure cash
payment before shipment without any credit risk or accounts receivable
management. Most direct response sales are, however, made with a guaranteed 30-
90 day return privilege. Historically, returns range from 20% to 40%. The
success of the direct response campaign is dependent on careful management of
the return rate.
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Product Endorsements. We promote our products to touring golf
professionals. In August, 1999, we entered into a five-year Endorsement
Agreement with professional golfer Fuzzy Zoeller whereby Zoeller will play,
endorse, and assist in the development of Carbite products worldwide. The
Agreement calls for payments to Zoeller in a combination of cash and stock of
$138,000 for the first six months (August, 1999 to February 2000) and five
annual payments of cash and stock thereafter with a dollar value of $300,000 in
Year 2, $300,000 in Year 3, $500,000 in Year 4, $550,000 in Year 5 and $575,000
in Year 6. We have the right to terminate the arrangement if 2001 sales do not
reach $25 million. We also have short-term arrangements with Chris Starkjohann
(Buy.com Tour), Mary Bryan (LPGA television analyst), and Johnny Gonzales (local
San Diego teaching pro).
Carbite Golf Web Site. Our products are promoted and offered for sale on
our internet web site (www.carbitegolf.com).
Our total advertising and marketing related expenses were approximately
$6.2 and $5.3 million for 1999 and 1998.
Manufacturing, Assembly and Raw Materials
The principal components of our golf clubs (club heads, shafts and grips)
are manufactured by outside suppliers and shipped to us for assembly. The
suppliers are selected based on the quality of the finished products, materials,
dependability and pricing. All club heads are designed by us and we provide the
manufacturers with detailed specifications. They are inspected prior to shipment
by a quality control inspector employed by us in Taiwan.
All assembly operations, including painting, stenciling and the application
of trade dress, are completed at our facility in San Diego, California. All
components are inspected upon arrival from the suppliers and are assembled under
the supervision of a full-time quality control inspector who conducts numerous
visual inspections at various points along the assembly process.
Dependence on Major Customers
During 1999 and 1998, no customer accounted for more than 10% of net sales
revenue.
Intellectual Property
We are the owner, by way of assignment by Chester Shira, of eight U.S.
registered patents which give the Company the exclusive right to produce golf
clubs incorporating the proprietary powder metallurgy processes set forth in
them. Eight additional patent applications are pending, but have not been
issued. Under a Royalty Agreement dated March 1, 1993, the Company pays Mr.
Shira a royalty of $.50 per club using the initial four patents which were
assigned in March, 1993.
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We sell most of our products under the Carbite brand name. We own the
following U.S. registered trademarks: "Carbite;" "Check Mate;" "Multi Density;"
"Dual Density;" and "Diatanium." The "Carbite" mark is also registered in Japan
and Germany.
Licenses
We have had success in licensing our technology to other companies.
In January, 1995, we licensed to Taylor Made Golf Company the rights to use
our bronze high friction inserts under the Taylor Made brand name on irons. In
March, 1997, that agreement was extended through December 31, 1999. For fiscal
years 1999 and 1998, we received royalty fees of $ -0- and $60,101 from Taylor
Made.
On October 28, 1998, we entered into a License Agreement with KZG Golf,
Inc. for the brazing of copper tungsten wood heads manufactured for Orlimar
Golf's TriMetal wood products. The term of the License Agreement is five years
and requires a minimum annual payment of $5,000. For 1999 and 1998, we received
$221,308 and $161,571 in royalties from KZ Golf.
Team Daiwa
In September, 1999, we acquired the rights to distribute Daiwa products in
North America and to develop new products using the Daiwa name. Specifically, we
entered into two agreements with Daiwa Seiko of Japan:
A Trademark License Agreement which permits us to use the Daiwa name and
other trademarks of Daiwa on golf products in the United States. The term
is five years with an option for an additional five-year term. We pay a
royalty of 6% of the FOB purchase price on all products sold under the
license. The agreement is subject to termination upon certain events,
including failure to meet certain minimum royalty amounts ($75,000 in Year
1, $225,000 in Year 2, $250,000 in Year 3, $375,000 in Year 4 and $450,000
in Year 5).
A Distribution Agreement which designates us as the exclusive distributor
of Daiwa golf products in the United States for a term of five years with
an option to renew for an additional five years. The agreement is subject
to termination upon certain events, including the failure for two
consecutive years to undertake to meet certain minimum purchase
obligations, which begin at $1.75 million for the first year of the
agreement and escalate substantially each year thereafter. The agreement
grants Daiwa a warrant, exercisable through September, 2002, to buy 300,000
shares of our common stock at fair market value. We are also required to
pay 10% of Daiwa net sales for advertising and promotion of Daiwa products
in the United States.
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Employees
As of December 31, 1999, we had 75 full-time employees, including 30 in
product assembly and shipping, 28 in sales and marketing, and 17 in management,
finance and administration. The employees are not represented by a union, and we
consider our relations with employees to be satisfactory.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations addresses our performance for the fiscal years ended
December 31, 1999 and 1998, and should be read in conjunction with our
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-SB.
Carbite, Inc.'s net sales are primarily derived from sales of golf
equipment to on-course and off-course golf shops, selected sporting goods
retailers, international distributors and direct sales to consumers. Carbite,
Inc.'s net sales are accounted for on an accrual basis for all wholesale sales
and on a cash basis for direct consumer sales.
Carbite, Inc. does not manufacture the components required to assemble its
golf clubs, relying instead on component suppliers. Costs of the clubs consist
primarily of component parts, including the head, shaft and grip. Cost of goods
sold also includes labor and occupancy costs in connection with the inspection,
testing and assembly of component parts at our facility in San Diego,
California. Operating expenses are composed primarily of selling and marketing
expenses, general and administrative expenses, and research and development
expenses. Selling and marketing expenses include advertising, marketing,
salaries and commissions.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The following table sets forth the operating results expressed as a
percentage of net sales for the periods indicated.
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Statement of Operations (Year Ended December 31)
1999 1998
Net Sales 18,510,901 100.0% $15,638,390 100.0%
Cost of goods sold 9,468,562 51.2% 6,679,384 42.7%
Gross profit 9,042,339 48.8% 8,959,006 57.3%
Operating expenses 8,674,002 47.0% 8,025,149 51.0%
Net operating income 368,337 2.0% 933,857 6.0%
Other expense 2,051 .01% 52,724 .4%
Amortization of goodwill and def costs 539,842 2.9% 531,860 3.4%
Gain on discontinued printing operation 66,673 .4% -0- 0.0%
Loss on disposal of fixed assets -0- 0% 57,954 0.4%
Income (loss) before income taxes (106,883) -.6% 291,319 1.8%
Income taxes 98,600 .5% 52,800 0.3%
Net income (loss) (205,483) -1.1% 238,519 1.5%
Net Sales
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Net consolidated sales for Carbite Golf Inc. for 1999 were $18.5 million
compared to $15.7 million for 1998. This increase in sales was principally due
to increases in sales of our Polar Balanced Putter product line to retail
accounts and the further growth of our total account base from approximately
2,000 to approximately 4,000.
Gross Profit
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Gross profit, as a percentage of sales, decreased to 49% in 1999 from 57%
in 1998, primarily because of a change in the mix of our sales between
infomercial and retail. Infomercial sales are made directly to consumers at
retail prices. Sales to retailers are at wholesale prices. We launched the
Polar Balanced Putter by infomercial in 1998 and then introduced it to retail.
Initially, the majority of sales are high margin infomercial sales which are
ultimately overtaken by lower margin but higher volume sales to retail accounts.
In 1999, the percentage of sales to retailers was larger than in 1998.
Operating Expenses
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Operating expenses, including R&D, increased to $8,674,002 for 1999
compared to $8,025,149 for 1998, but decreased as a percentage of sales to 47%
in 1999 versus 51% in 1998. This decrease was principally due to reduced
Selling Expenses as noted below.
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Selling Expenses
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Selling expenses were $6,216,698 in 1999 versus $6,454,481 in 1998 but were
less as a percentage of sales in 1999 vs. 1998 at 33.6% versus 41.3%. As we
rolled back our Polar Balanced Putter infomercial, media spending was decreased.
G&A Expenses
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The G&A expenses increased to $1,896,688 in 1999 from $1,224,768 in 1998,
to 10.2% of sales in 1999 vs. 7.8% of sales in 1998. There were additional
administrative personnel added in 1999 to plan and organize further growth as
well as the expense associated with a new upgraded computerized information
system. We also had increased expense for Bad Debt, including a reserve of
$120,000 for one significant customer.
Research and Development Expenses
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R&D increased in 1999 to $560,616 versus $345,900 in 1998. This spending
was in improvements of Z series putters and development time of the new Polar
Balanced Wedge to be introduced in 2000. There was also expense in improving
the various insert materials and processes for the current putters and wedges.
Other Expenses
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Other expenses were the same for amortization of deferred costs, patents,
and goodwill. These costs were $539,842 in 1999 and $531,860 in 1998. There
was a loss on the sale of assets in 1998 of $57,954 vs. no dispositions in 1999.
The dissolution of the printing subsidiary in Canada produced other income of
$66,673 in 1999 vs. expenses from the operation of $52,025 in 1998.
Income Taxes
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These provisions are computed at a combined rate of 43% for U.S. Federal
and State income taxes with exceptions of nondeductible goodwill and some U. S.
future tax assets from losses carried forward and unclaimed research and
development expenditures.
Capital Expenditures
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Capital expenditures were $400,990 in 1999 and $354,115 in 1998, an
increase of $46,875, principally due to an investment in software for an
improved information system. This system will help in our future growth.
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Liquidity and Capital Resources
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We have historically financed our business through cash flow from
operations and the private placement of equity and/or debt securities. Such
funds have been supplemented from time to time with short-term borrowings from
commercial lenders.
In February, 1998, $842,000 was raised through private equity placements
made outside the United States. In February 1999, an additional equity of
approximately $530,000 was raised through the exercise of 1,454,545 warrants
issued in a February, 1997 private placement made outside the United States. An
additional $100,000 of equity was raised in March, 1999 through the exercise of
employee options.
Net cash provided by operating activities was $11,000 for the year ended
December 31, 1999 compared to $10,979 in 1998.
In April, 1998, we borrowed $500,000 from a private party to finance the
initial launch of the Polar Balanced putter infomercial. The Loan Agreement
dated August 14, 1998 with James A. Henderson and Susan V. Henderson, as Co-
Trustees of The Henderson Living Trust, ("Henderson") provided for a term of one
year at an interest rate of 10% and included a conversion provision whereby
Henderson had the right to convert the loan to units of the Company's stock and
warrants to purchase an additional share. In November, 1998, Henderson
converted $250,000 of the loan to 678,750 units. In December, 1998, the Company
repaid the remaining $250,000 of the loan.
We have two commercial credit facilities, both with Scripps Bank in San
Diego, California, including a $1,000,000 Revolving Credit Facility, which
expires on November 15, 2000 and a $60,000 term equipment loan due November 15,
2002. As of December 31, 1999, we had drawn $191,925 under the Credit Facility
and the full balance of $60,000 remained due on the equipment loan. Both credit
facilities are at the lender's general refinance rate of interest. The
Revolving Credit Facility is collateralized by our accounts receivable. The
equipment loan is collateralized by the equipment purchased from the loan
proceeds.
We believe that, as of December 31, 1999, cash flow from operations, and
the Company's $1,000,000 credit facility should be sufficient to meet operating
needs and capital expenditures to maintain sales at the current levels. But, to
finance additional growth and new product introductions planned through fiscal
years 2000 - 2001, we believe it will require approximately $1,000,000 in equity
or debt private placement financing.
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Computer Systems and Year 2000 Compliance
As of May 1, 1999, we initiated a system-wide upgrade of all computer
systems which are intended to provide state-of-the-art systems and hardware for
financial, manufacturing, customer services and telemarketing functions. The
system was operational by December 1, 1999 and has not experienced any Year 2000
problems. Total costs associated with the new system, including Year 2000
compliance, were approximately $100,000. Overall, the new system has improved
operations, although there remain some on-going implementation difficulties.
Risk Factors That May Affect Future Results and Financial Condition
The Company's operations and financial results are subject to numerous
risks, many of which are beyond the Company's control, including:
Dependence on New Product Introductions; Uncertain Consumer Acceptance
During 1999 and 1998, approximately 85.5% and 81.9% of our net sales were
derived from sales of the Polar Balanced Putter line. Such sales are expected
to account for a substantial portion of our net sales for some time. A decline
in demand for, or average selling prices of, the Polar Balanced Putter would
have a material adverse effect on our business.
Our continued growth and success depend, in large part, on our ability to
successfully develop and introduce new products accepted in the marketplace.
Historically, a large portion of new golf club technologies and designs have
been rejected by consumers. No assurance can be given that new products we are
developing now or will develop in the future will meet with market acceptance.
Plus, our competitors are always working on new products. Accordingly, our
operating results could fluctuate as a result of the amount, timing and market
acceptance of new product introductions by us and our competitors.
USGA Regulations
The design of new golf clubs is greatly influenced by the rules and
interpretations of the U.S. Golf Association ("USGA"). Although the golf
equipment standards established by the USGA generally apply only to competitive
events sanctioned by that organization, we believe it is critical that new clubs
comply with USGA standards. No assurance can be given that any new products
will receive USGA approval or that existing USGA standards will not be altered
in ways that adversely affect the sales of our products.
Patents and Protection of Proprietary Technology
Our ability to compete effectively in the golf club market will depend, in
part, on our ability to maintain the proprietary nature of our technologies and
products. We own, by way of assignment from Chester Shira, eight U.S. patents
which are incorporated in some of our
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products. These patents may, however, have limited commercial value or may lack
sufficient breadth to adequately protect the aspects of our products to which
the patents relate. The Company's U.S. patent rights do not preclude competitors
from developing or marketing products similar to our products in international
markets.
There can be no assurance that competitors, many with greater resources
than us, will not apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products. We are aware of
numerous patents held by third parties that relate to products competitive to
ours. There is no assurance that these patents would not be used to challenge
the validity or limit the scope of our patents. A successful challenge to the
validity of any of our patent rights may adversely affect our competitive
position. Moreover, there can be no assurance that such patent holders or other
third parties will not claim infringement by us with respect to current and
future products. Because U.S. patent applications are held and examined in
secrecy, it is also possible that presently pending U.S. applications will
eventually issue with claims that will be infringed by our products or
technologies. The defense and prosecution of patent suits is costly and time-
consuming, even if the outcome is favorable. This is particularly true in
foreign countries where the expenses associated with such proceedings can be
prohibitive. An adverse outcome in the defense of a patent suit could subject
us to significant liabilities to third parties, require us to cease selling
products or require disputed rights to be licensed from third parties. Such
licenses may not be available on satisfactory terms, or at all. We also rely on
unpatented proprietary technology - third parties could develop the same or
similar technology or otherwise obtain access to that proprietary technology.
Dependence on Golf Industry
Our financial performance is dependent in large part upon the current and
anticipated market demand for golf equipment. During 1998 and early 1999, the
golf equipment industry experienced periods of oversupply. There can be no
assurance that such growth will return and that the slowdown will not continue.
A reduced rate of growth in the demand for golf equipment due, for example, to
competitive factors, technological change or otherwise, may materially adversely
affect the markets for the Company's products.
Highly Competitive Industry; Significant Price Competition
The market for golf clubs is highly competitive. Our competitors include a
number of established companies, most of which have greater financial and other
resources. The purchasing decisions of many golfers are often the result of
highly subjective preferences, which can be influenced by many factors,
including, advertising, media, promotions and product endorsements. We could,
therefore, face substantial competition from existing or new competitors that
introduce and successfully promote golf clubs that achieve market acceptance.
There can be no assurance that our marketing strategy will not be emulated by
others, thereby diluting our message or forcing us to adopt a new marketing
strategy. Such competition could result in significant price erosion or
increased promotional expenditures, either of which could have a material
adverse effect on the business. There can be no assurance that we will be able
to compete successfully against current and future sources of competition.
14
<PAGE>
Seasonality and Quarterly Fluctuations; Discretionary Consumer Spending
Golf generally is regarded as a warm weather sport and sales of golf
equipment historically have been strongest during the second and third quarters,
weakest during the fourth quarter. Sales of golf clubs are dependent on
discretionary consumer spending and, as such, may be affected by general
economic conditions. A decrease in consumer spending generally could result in
decreased spending on golf equipment, which could have a material adverse effect
on our business. Our future results could also be affected by many other
factors, such as unseasonal weather patterns; demand for and market acceptance
of existing and future products; new product introductions by competitors;
competitive pressures resulting in lower than expected average selling prices;
and the volume of orders that are received and that can be fulfilled in a
quarter. Any one or more of these factors could result in a reduction in
future sales or net income. Because most operating expenses are relatively
fixed in the short term, we may be unable to adjust spending sufficiently in a
timely manner to compensate for any unexpected sales shortfall, which could
materially adversely affect quarterly results of operations. If technological
advances by competitors or other competitive factors require us to invest
significantly greater resources than anticipated in research and development or
sales and marketing efforts, our business could be materially adversely
affected. Accordingly, we believe that period- to-period comparisons of results
of operations should not be relied upon as an indication of future performance.
The results of any quarter are not indicative of results to be expected for a
full fiscal year. As a result of fluctuating operating results or other factors
discussed above and below, in certain future quarters our results of operations
may be below the expectations of public market analysts or investors. In such
event, the market price of our Common Stock would be materially adversely
affected.
Future Capital Needs; Need for Additional Financing
We estimate that we may need significant funding, in addition to our
present capital, to be able to fully develop and expand our business. Our
future capital requirements will depend upon many factors, including the extent
and timing of acceptance of our products in the market, commitments to third
parties to develop and manufacture products, the progress of our R & D efforts
and our operating results. In 1999, we raised approximately $942,000 in
additional capital.
Ability to Manage Growth
We recently experienced a period of rapid growth that has resulted in new
and increased responsibilities for existing management personnel. Our growth
has placed, and is expected to continue to place, a strain on our systems and
resources to accommodate this recent growth. To compete effectively and manage
future growth, if any, we will be required to continue to implement and improve
our operational, financial and management information systems, procedures and
controls on a timely basis and to expend, train, motivate and manage our
workforce. There can be no assurance that our personnel, systems, procedures
and controls will be adequate to support its existing or future operations. Any
failure to implement and improve
15
<PAGE>
our financial and management systems or to expand, train, motivate or manage
employees could have a material adverse effect on the business.
Dependence on Key Personnel
Our success depends upon the performance of our senior management team.
There is strong competition for qualified personnel in the golf club industry,
and the inability to continue to attract, retain and motivate other key
personnel could adversely affect our business.
Risks Associated with Acquisitions
We regularly review possible acquisition opportunities and may make future
acquisitions of complementary services, technologies, product designs or
businesses in the future. We have no letters of intent or agreements for any
acquisitions. There can be no assurance that future acquisitions, if any, will
be completed or that, if completed, any such acquisition will be effectively
assimilated into our business. Acquisitions involve numerous risks, including,
among others, loss of key personnel of the acquired company, the difficulty
associated with assimilating the personnel and operations of the acquired
company, the potential disruption of our ongoing business, the maintenance of
uniform standards, controls, procedures and policies, and the impairment of our
reputation and relationships with employees and customers. In addition, any
future acquisitions could result in the issuance of dilutive equity securities,
the incurrence of debt or contingent liabilities, and amortization expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on our business.
Effect of Outstanding Options and Warrants
As of December 31, 1999, there were outstanding options to purchase an
aggregate of 2,944,240 shares of common stock and outstanding warrants to
purchase an aggregate of 791,250 shares of common stock. As of December 31,
1999, we had 22,426,486 shares of common stock outstanding. The exercise of
such outstanding options and warrants would dilute the percentage ownership of
our stock, and any sales in the public market of common stock underlying such
stock options could adversely affect prevailing market prices for the common
stock. Moreover, the terms upon which we would be able to obtain additional
equity capital could be adversely affected by the existence of such options or
warrants.
Credit Risk
We primarily sell our products to golf equipment retailers and
distributors, and directly to customers via infomercials and direct response
programs. We perform ongoing credit evaluations of our customers' financial
condition and generally require no collateral from these customers. The 1998-
1999 downturn in the retail golf equipment market resulted in delinquent or
uncollectible accounts for some of our customers. Management does not foresee
any immediate improvement in the golf equipment market, and therefore expects
this trend to continue. Accordingly, there can be no assurance that our results
of operations or cash flows will not be adversely impacted by the failure of our
customers to meet their obligations.
16
<PAGE>
Technological Changes
The manufacture and design of golf clubs has undergone significant changes
with respect to design and materials in recent years. The introduction of new
or enhanced technologies or designs by competitors could render our products
less marketable. Our ability to compete successfully will depend to a large
degree on our ability to innovate and respond to changes and advances in its
industry.
Risks of Technical Problems or Product Defects
There is no assurance, despite testing and quality assurance efforts, that
technical problems or product defects will not be found, resulting in loss of or
delay in market acceptance and sales, diversion of development resources, injury
to our reputation or increased service and support costs, any of which could
have a material adverse effect on the Company's business. Moreover, there is no
assurance that we will not experience difficulties that could delay or prevent
the development and introduction of products and services, that new or enhanced
products and services will meet with market acceptance, or that advancements by
competitors will not erode our position or render our products and services
obsolete.
Dependence on Limited Number of Component Suppliers
We assemble all of our branded clubs at the San Diego facility. We do not
manufacture the components required to assemble the golf clubs. We are
dependent on a limited number of suppliers and do not have written supply
agreements with any of them. Three suppliers for heads, all based in the Far
East; three suppliers for shafts are based in the Far East; and three suppliers
for grips are based in the Far East. Therefore, our success will depend on
maintaining our relationships with existing suppliers and developing
relationships with new suppliers. We believe that there are readily available
alternative sources for each of the components used in the manufacture and
assembly of our clubs, but there can be no assurance. Any significant delay or
disruption in the supply of components from suppliers or any diminution of
quality would have a material adverse effect on our business. Such adverse
effect would be exacerbated if any supply delay or quality problem occurred
prior to or during the nine month period ending September 30 (the period during
which sales of golf equipment generally are expected to be the highest).
We plan our orders to manufacturers based upon the forecasted demand for
our products. Actual demand may be more or less than the forecasted demand.
Since our overseas club head vendors generally require at least 45-60 days lead
times to produce heads after a purchase order is placed, and since shipments
from these vendors average 20-25 days, our ability to quickly expand our
manufacturing capacity for new products is limited. If we are unable to produce
sufficient quantities of new products in time to fulfill actual demand, it could
limit our sales and adversely affect our financial performance. If actual
demand is less than forecasted, we could have excess inventories and related
obsolescent charges that could adversely affect financial performance.
17
<PAGE>
Reliance on Independent Domestic Sales Representatives
Sales of our products are dependent, in part, on a nationwide network of
independent sales representatives. While we believe that our relationships with
sales representatives and customers are satisfactory, there can be no assurance
that we will be able to maintain such relationships. Our sales representatives
are not exclusive and may also provide services for other golf club equipment
manufacturers that offer product lines competitive with ours. Although we work
closely with our sales representatives, we cannot directly control such
representatives' sales and marketing activities. There can be no assurance that
these representatives will effectively manage the sale of our products or that
our selling efforts will prove effective.
International Sales; Reliance on Limited Number of Foreign Distributors
During 1999 and 1998, sales to international customers, primarily through
one customer which markets products in Japan, accounted for approximately 9.4%
and 6.0% of our net sales. Accordingly, if this distributor ceases to purchase
golf clubs, sales will be reduced significantly. We rely exclusively on this
and other foreign distributors to market and sell our products outside the
United States. Although we work closely with its foreign distributors, we
cannot directly control such distributors' sales and marketing activities and,
accordingly, cannot manage our product sales in foreign markets. Our foreign
distributors may also distribute, either on behalf of themselves or other golf
club equipment manufacturers, other product lines, including product lines that
may be competitive with ours. Additionally, our international sales may be
disrupted or adversely affected by events beyond our control, including currency
fluctuations and political or regulatory changes.
ITEM 3. DESCRIPTION OF PROPERTY
For all of 1999, our principal offices were located at 6330 Nancy Ridge
Drive in San Diego, California. In October, 1999, we entered into a lease for
new facilities located at 9985 Huennekens Street, San Diego, California. We
relocated to the new facility in February, 2000, after expiration of the prior
lease in January, 2000. The new facility includes approximately 26,000 square
feet of office, warehouse, manufacturing and research and development space.
The base rent is $20,185 per month and our lease runs through February, 2004.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of December 31, 1999 by: (i) each
person who is known to own beneficially more than five percent of the Company's
common stock; (ii) each of the Company's directors; (iii) each Named Executive
Officer; and (iv) all directors and executive officers as a group.
18
<PAGE>
<TABLE>
<CAPTION>
Amount of
Common Stock Approximate
and Nature of Percent of
Beneficial Beneficial
Name and Address of Beneficial Owner/(1)/ Ownership Ownership/(2)/
----------------------------------------- --------------- ----------------
<S> <C> <C>
Chester S. Shira/(3)/........................................ 4,568,130 20.36%
Michael A. Spacciapolli(4)/.................................. 1,587,694 7.07%
Randie Burrell/(5)/.......................................... 234,400 1.04%
David Nairne/(6)/............................................ 349,570 1.56%
James Henderson/(7)/......................................... 1,465,072 6.53%
All directors and executive officers as a group (5 persons).. 8,204,866 36.50%
</TABLE>
_______________
(1) Unless otherwise indicated, the address of each person is in care of the
Company at 9985 Huennekens Street, San Diego, California 92121. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options, warrants
or convertible securities that are currently exercisable, or exercisable
within 60 days of December 31, 1999 are deemed outstanding for computing
the percentage of the person holding such options, warrants or convertible
securities but are not deemed outstanding for computing the percentage
owned by any other shareholder listed. Except as indicated by footnote and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shares as beneficially owned by them.
(2) Percentage ownership is based on 22,426,486 shares outstanding as of
December 31, 1999.
(3) Includes 239,620 shares which Mr. Shira has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of December 31, 1999.
(4) Includes 1,164,120 shares which Mr. Spacciapolli has the right to acquire
upon exercise of outstanding options and all of such options were
exercisable as of December 31, 1999.
(5) Includes 77,500 shares which Mr. Burrell has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of December 31, 1999.
(6) Includes 20,000 shares which Mr. Nairne has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of December 31, 1999.
(7) Includes a warrant to acquire 678,750 shares of Common Stock exercisable at
$.80 per share through April, 1999, and exercisable at $.95 per share
through April, 2000, and all of the shares underlying the warrant are
exercisable as of December 31, 1999.
19
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
As of December 31, 1999, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Chester S. Shira............... 71 Director of Research and Development and Chairman of the Board
Michael A. Spacciapolli........ 47 President, Chief Executive Officer and Director
Randie Burrell................. 47 Chief Financial Officer
David Nairne................... 45 Director
James Henderson................ 48 Director
</TABLE>
Chester S. Shira is the founder of our wholly-owned subsidiary, Carbite,
Inc., and has been our Chairman of the Board since 1988. From 1988 to 1994 he
also served as President and Chief Executive Officer of the Company. Mr. Shira
has been Chairman of the Board and Director of Research and Development since
1997. Mr. Shira spent 11 years managing all aspects of welding, forging and
metal finishing development for North American Rockwell and four years with
Lincoln Electric Company, working in the areas of application engineering and
process controls. He has over 40 years experience as a metallurgist and welding
engineer. Mr. Shira has a BA from Ohio State University, and is a registered
professional metallurgical engineer in California and Ohio.
Michael A. Spacciapolli joined Carbite, Inc. in 1992 as Executive Vice
President. He has been the President, Chief Executive Officer and a Director of
Carbite, Inc. since 1995 and was the Chief Financial Officer from 1992 to 1998.
Mr. Spacciapolli has been the President, Chief Executive Officer and a Director
since 1997. From 1988 to 1992, Mr. Spacciapolli was the Director of Business
Development for the accounting firm of Sterres, Alpert and Carne. Prior to
joining Sterres, Alpert and Carne, Mr. Spacciapolli was a Vice President and
District Manager for Wells Fargo Bank with responsibility for 18 branch
locations and over 200 employees in San Diego. Mr. Spacciapolli has a BS in
Accounting from Rochester Institute of Technology. In May, 2000, Mr.
Spacciapolli was named Vice Chairman and John Pierandozzi was named President.
Randie Burrell joined the Company as Chief Financial Officer in 1998. From
June 1995 through August 1997 he was the Managing Partner of the ViperBite
Company, a partnership between Advanced Golf Systems, Inc. and Carbite, Inc.
From 1993 to 1995 he was the Chief Financial Officer for Advanced Golf Systems,
Inc. In May, 2000, Mr. Burrell resigned to join another company.
David Nairne was appointed as a director in 1996. Mr. Nairne is President
of Cedaridge Development and Management LTD, a private company in real estate
based in Vancouver,
20
<PAGE>
Canada. Cedaridge provides equity financing to other developers, as well as
undertaking developments for its own account in both Canada and the United
States. Prior to joining Cedaridge, Mr. Nairne was Vice President of Communities
Southwest in Irvine, California from August, 1993 to November, 1995. Communities
Southwest was a major developer of residential communities throughout southern
California. Mr. Nairne received his Bachelor of Commerce degree in 1997 and his
Bachelor of Laws degree in 1978.
James Henderson was elected as a director in May, 1999. Mr Henderson was
the Chief Executive Officer of Advanced Machine Programming from 1980- 1996.
From 1996 to present, Mr. Henderson has been a consultant.
We have a currently effective directors and officers liability insurance
policy.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth compensation paid for the fiscal years ended
December 31, 1999 and 1998 to the Chief Executive Officer and the other
executive officers (collectively the "Named Executive Officers") whose total
annual salary and bonus exceed $100,000 in the fiscal year ended December 31,
1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation/(2)/ Awards
--------------------------------- --------
Securities
Other Annual Underlying All other
Salary Bonus Compensation Options/SAR's Compensation
Name and Principal Position Year ($) ($) ($)/(3)/ ($) ($)/(1)/
--------------------------- ---- ----- --- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Chester S. Shira, Chairman of the Board and 1999 140,000 25,000 174,637
Director of Research and Development 1998 128,817 30,000 168,445 75,000
1997 128,817 124,181
Michael A. Spacciapolli, President and Chief 1999 150,000 12,500 697,500
Executive Officer 1998 140,719 60,000 125,000
1997 140,719
Randie Burrell, Chief Financial Officer/(1)/ 1999 120,000 10,000
1998 96,000 47,500
</TABLE>
_____________
(1) Mr. Burrell joined the Company in 1998.
(2) The compensation described in this table does not include certain
perks and other personal benefits received by the Named Executive
Officers, the value of which does not exceed the lesser of $50,000 or
10% of the Named Executive Officers total annual salary and bonus.
(3) Represents royalties paid to Mr. Shira pursuant to a Royalty Agreement
dated March 1, 1993 between the Company and Mr. Shira and pursuant to
an arrangement with the Company whereby he received 1/3 of all
royalties received from licensee KZ Golf.
21
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning stock option grants
made to the Chief Executive Officer and each of the other Named Executive
Officers for the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------
Number of % of Total
Securities Options/SAR's
Underlying Granted to
Options/SAR's Employees Exercise or
Name Granted (#) in Fiscal Year Base Price ($/Sh) Expiration Date
---- -------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Michael A. Spacciapolli 450,000 37.0% $0.85 (Cdn) March 26, 2004
Michael A. Spacciapolli 247,500 21.0% $0.77 (Cdn) March 23, 2004
Randie Burrell 10,000 1.0% $0.42 (Cdn) December 31, 2004
</TABLE>
Option Exercise and Holdings
The following table sets forth information concerning option exercises and
option holdings for the year ended December 31, 1999, with respect to Chief
Executive Officer and the Named Executive Officers:
<TABLE>
<CAPTION>
Aggregate Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
---------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options/SAR's at In-The-Money Options/SAR's
Value Realized Market Fiscal Year End at Fiscal Year End ($U.S.)(1)
Shares Acquired on Price at Exercise less ---------------------------- ------------------------------
Name Exercise (#) Exercise Price Exercisable Unexercisable Exercisable Unexercisable
--- ------------ -------------- ---------------------------- ------------------------------
($US)
----
<S> <C> <C> <C> <C> <C> <C>
Chester S. Shira --- --- 239,620 -- -0- ---
Michael A. Spacciapolli 150,000 $ 20,689 1,164,120 -- -0- ---
Randie Burrell --- --- 77,500 -- -0- ---
</TABLE>
___________________
(1) Based on the closing price of $.43 Canadian on the Vancouver Stock
Exchange on December 31, 1999 with a U.S. conversion rate of 1.45.
Compensation of Directors
We reimburse directors for expenses in connection with attending Board
and Committee meetings, but do not pay them for serving as Directors.
22
<PAGE>
Employment Agreements
We have maintained employment agreements with Messrs. Spacciapolli and
Shira, which provide for employment for a three year term beginning September 3,
1997, at an annual salary of not less than $125,000, and such other periodic and
extraordinary compensation deemed appropriate by the Board. Following the three
year term, their employment shall renew automatically for one year on each
anniversary date unless either party provides notice of non-renewal.
Messrs. Spacciapolli and Shira's employment agreements also provide that in
the event their employment is terminated pursuant to the employment agreement,
or a notice of non-renewal is issued by the Company, they shall continue to be
paid for a period of six months. In the event either of them are terminated
other than pursuant to the employment agreements, they shall each receive the
compensation provided for in their employment agreements for the remainder of
the term.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Royalty Agreement dated March 1, 1993, we pay royalties to
Chester S. Shira, Director of Research and Development and Chairman of the
Board. The Royalty Agreement provides for a royalty of $.50 per club on clubs
employing any of the inventions set forth in the four patents assigned to us by
Mr. Shira in March, 1993. The term of the Agreement is coextensive with the life
of each of the four patents. Thereafter, as to the inventions underlying each
patent, the Agreement may be extended upon mutual agreement with a royalty of
$.30 on each club. All royalty payments are current. For 1999 and 1998, we paid
Mr. Shira a total of $115,017 and $99,381, in connection with the 1993 Royalty
Agreement.
We have also paid Mr. Shira royalties in connection with licenses of other
patents owned by the Company to certain third parties. In 1999 and 1998, we
paid Mr. Shira $58,600 and $67,398 as one-third of all royalties we received in
1999 and 1998 from KZ Golf in connection with our License Agreement with KZ Golf
dated October 28, 1998. In 1998, we paid Mr. Shira $1,667 as one-third of the
royalties received by us from New Abiding.
By an Agreement dated April 14, 1998, James A. Henderson (a Director as of
May 19, 1999) and Susan V. Henderson as Co-Trustees of the Henderson Living
Trust ("Henderson") made a loan to the Company in the amount of $500,000. The
loan term was for a period of one year (callable after six months) at an
interest rate of 10%. The loan agreement included a conversion provision under
which Henderson had the right to convert the loan amount into units consisting
of one share of common stock and one two-year warrant (collectively, "Units") to
purchase an additional common share at CDN $.80 in the first year and CDN $.95
in the second year at a price per unit of CDN $.80 per unit. In November, 1998,
the units were repriced to $.52 Canadian with the warrant repriced at $.52 in
the first year and $.50 Canadian in the second year. As incentive to make the
loan, Henderson was paid a "Bonus" equal to 12% of the $500,000
23
<PAGE>
loan, paid in shares of common stock at a per share price of CDN $.80 per share,
which was reduced to $.52 per share in March, 1998. In November, 1998, Henderson
converted $250,000 of the loan to 678,750 Units, which included one share of
common stock at $.52 Canadian per share with one two-year warrant to purchase an
additional share at $.52 Canadian in the first year and $.60 Canadian in the
second year. The remaining $250,000 of the loan was repaid by the Company on
December 4, 1998. The proceeds of this loan were used to finance the initial
launch of the Polar Balanced Putter infomercial at a time when we did not have
ready access to adequate credit or capital to launch the infomercial.
During the year ended December 31, 1999, Messrs. Spacciapolli and Shira
were paid $162,500 and $165,000, respectively, in salary and bonus.
Randie Burrell, the Chief Financial Officer, has been granted options to
acquire a total of 77,500 shares of Common Stock, of which 17,500 shares are
exercisable at $.80 Canadian per share, and the remaining 60,000 shares are
exercisable at $.60 Canadian per share.
Mr. Nairne, a director, has been granted an option to acquire a total of
20,000 shares of Common Stock, exercisable at $.60 Canadian per share.
Chester S. Shira, Director of Research and Development and a Director, has
been granted options to acquire a total of 239,620 shares of Common Stock,
exercisable at $.60 Canadian per share.
Michael A. Spacciapolli, the President, Chief Executive Officer and a
director, has been granted options to acquire a total of 1,164,120 shares of
Common Stock. 607,000 shares are exercisable at $.01 Canadian per share;
139,620 shares are exercisable at $.60 Canadian per share; 247,500 shares are
exercisable at $.77 Canadian per share, and 170,000 shares are exercisable at
$.85 Canadian per share.
ITEM 8. LEGAL PROCEEDINGS
None
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Common Stock Market
-------------------
Our common stock trades on the Canadian Venture Exchange, Canada under the
symbol "CAB." The following table sets forth for the periods indicated the high
and low closing prices for the common stock provided by the Canadian Venture
Exchange.
24
<PAGE>
Fiscal Year 1999
----------------
First Quarter $1.16 $.55
Second Quarter 1.05 .62
Third Quarter .80 .53
Fourth Quarter .65 .35
Fiscal Year 1998
----------------
First Quarter
Second Quarter $1.02 $.50
Third Quarter .80 .60
Fourth Quarter 1.02 .60
.80 .40
We have authorized capital stock of 50,000,000 shares of common stock, no
par value.
As of December 31, 1999, we had 22,426,486 shares of common stock
outstanding, with approximately 192 holders of records.
We have not paid or declared any cash dividends on shares of our common
stock and do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain any future earnings for use in the operation and
growth of our business.
In May, 1999 the shareholders authorized the Board to implement a 1:4
reverse split, but as of December 31, 1999, the Board has taken no action.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Sales to United States Residents
From December 1, 1996 through December 31, 1999, the Company sold or issued
the following securities to persons or entities who are resident in the United
States:
1. In January, 1997, the Company granted an option to purchase 50,000
shares of common stock at an exercise price of $1.50 Canadian per share to a
director. The option expired unexercised.
2. In August, 1997, in connection with the Company's acquisition of
Carbite, Inc., the Company issued an aggregate of 6,263,872 shares of common
stock to the shareholders of Carbite Inc. in exchange for all of the then issued
and outstanding shares of Carbite, Inc.
25
<PAGE>
3. In August, 1997, in connection with the Company's acquisition of
Advanced Golf Systems, Inc. ("Advanced"), the Company issued an aggregate of
700,000 shares of its common stock and warrants to purchase an additional
700,000 shares to the shareholders of Advanced in exchange for all of the then
issued and outstanding shares of Advanced. The warrants expired unexercised.
4. In August, 1997, the Company granted an option to purchase 450,000
shares of common stock at an exercise price of $1.50 Canadian per share to a
director. The option expired unexercised.
5. In September, 1997, in connection with the Company's acquisition of
Carbite, Inc., the Company granted an option to purchase 607,000 shares of
common stock at an exercise price of $.01 Canadian per share to Michael A.
Spacciapolli, the Company's President.
6. In October, 1997, the Company granted options to purchase an aggregate
of 435,000 shares of common stock at an exercise price of $1.00 Canadian per
share to officers, directors and employees and ten consultants of the Company.
7. In December, 1997, the Company granted an option to purchase 7,500
shares of common stock at an exercise price of $.75 Canadian per share to a
consultant to the Company.
8. In February, 1998, the Company granted options to Michael Spacciapolli,
its President, and Chester Shira, its Chairman, to each acquire 87,620 shares of
common stock at an exercise price of $1.00 Canadian per share; reduced the
option granted to a director in August, 1997 from 450,000 shares to 250,000
shares; and reduced the exercise price of all outstanding options as of February
28, 1998 (except for the option to acquire 607,000 shares at $.01 granted to the
Company's President in September, 1997) to $.60 Canadian per share. All exercise
price re-pricings were approved by the Vancouver Stock Exchange.
9. In April, 1998, the Company issued an aggregate of 190,666 shares of
common stock (at a rate of $0.60 Canadian of principal indebtedness per share)
to the following in cancellation of certain indebtedness of the Company to them:
2M Group; Lewis, England & Associates, Inc.; Luce, Forward, Hamilton & Scripps,
LLP; and Shimshon Hasson.
10. In April, 1998, the Company granted options to purchase an aggregate
of 162,500 shares of common stock at an exercise price of $.80 Canadian per
share to an officer, employees and one consultant of the Company.
11. In July, 1998, the Company granted an option to purchase 35,000 shares
of common stock at an exercise price of $.85 Canadian to a director; granted an
option to purchase 5,000 shares of common stock at an exercise price of $.85
Canadian to an employee; and issued 67,500 shares to a consultant to the Company
upon the exercise of stock options for an aggregate exercise price of $40,500
Canadian.
26
<PAGE>
12. In August, 1998, the Company issued 107,572 shares of common stock to
James A. Henderson and Susan V. Henderson as Co-Trustees of The Henderson Living
Trust ("Henderson") dated April 3, 1990 in consideration for entering into a
Loan Agreement dated August 14, 1998 whereby Henderson loaned the Company
$500,000 U.S.
13. In November, 1998, the Company granted options to purchase an
aggregate of 559,000 shares of common stock at an exercise price of $.60
Canadian per share to officers, directors, employees and six consultants to the
Company.
14. In December, 1998, the Company granted an option to purchase 100,000
shares of common stock at an exercise price of $.70 Canadian per share to a
consultant to the Company.
15. In January, 1999, the Company issued 678,750 shares of common stock
(at a rate of $0.52 Canadian of principal indebtedness per share) and warrants
to purchase an additional 678,750 shares of common stock to James A. Henderson
and Susan V. Henderson as Co-Trustees of The Henderson Living Trust
("Henderson") in cancellation of certain indebtedness of the Company to
Henderson.
16. In March, 1999, the Company issued 150,000 shares to Michael
Spacciapolli, the Company's President, in exchange for $90,000 Canadian upon
exercise of stock options; granted the Company's President, Michael
Spacciapolli, options to acquire 450,000 shares at an exercise price of $.85
Canadian (280,000 of these options were returned and cancelled by December 31,
1999); granted Michael Spacciapolli options to acquire 247,500 shares at an
exercise price of $.77 Canadian; and granted a consultant to the Company an
option to acquire 2,500 shares at an exercise price of $.77 Canadian.
17. In March, 1999, the Company issued an aggregate of 150,000 shares of
common stock and warrants to purchase an additional 150,000 shares of common
stock in a private placement to four investors for an aggregate purchase price
of $60,000 Canadian.
18. In April, 1999, the Company issued 37,500 shares of common stock to
one investor upon the exercise of stock warrants for an aggregate exercise price
of $15,000 Canadian.
19. In June, 1999, the Company granted an option to purchase 50,000 shares
of common stock at an exercise price of $.70 Canadian per share to a director.
20. On December 31, 1999, the Company granted options to purchase an
aggregate of 180,000 shares of common stock to 15 employees at an exercise price
of $.42 Canadian per share.
21. The Company is obligated, upon regulatory approval by the Vancouver
Stock Exchange, to issue approximately 195,000 shares of common stock to golf
professional Fuzzy Zoeller for his services during the first six months of his
Endorsement Agreement dated August 20, 1999.
27
<PAGE>
For paragraphs 1 and 4 - 20 herein, no underwriters were used with these
transactions, and the registrant relied upon the exemptions provided by Section
4(2) and/or Regulation D of the Securities Act. For paragraphs 2 and 3, the
registrant relied upon the exemption provided by Section 3(a)(10) of the
Securities Act. All references are to Canadian dollars.
28
<PAGE>
Sales to Non-United States Residents
From December 1, 1996 through December 31, 1999, the Company sold or issued
the following securities outside of the United States to persons or entities who
are resident outside the United States:
1. In January, 1997, the Company granted an option to purchase an
aggregate of 450,000 shares of common stock at an exercise price of $1.50
Canadian per share to two officers who reside in Canada.
2. In May, 1997, the Company issued 350,000 shares of common stock to a
Canadian company upon exercise of warrants for an aggregate exercise price of
$402,500 Canadian.
3. In June, 1997, the Company issued 100,000 shares of common stock to an
officer resident in Canada upon exercise of stock options for an aggregate
exercise price of $150,000 Canadian.
4. In August, 1997, the Company issued 150,000 shares of common stock to
a director resident in Canada for services to the Company.
5. In September, 1997, the Company issued 80,000 shares of common stock
to a former director resident in Canada who is now deceased, upon exercise of
stock options for an aggregate exercise price of $48,000 Canadian.
6. In October, 1997, the Company granted options to purchase an aggregate
of 635,00 0 shares of common stock at an exercise price of $1.00 Canadian per
share to four officers and directors resident in Canada.
7. In February, 1998, the Company amended a prior option granted to a
director resident in Canada to increase the options granted from 50,000 shares
at $1.00 Canadian to 100,000 shares at $1.00 Canadian.
8. In April, 1998, the Company sold an aggregate of 1,454,545 shares of
common stock and warrants to purchase an additional 1,454,545 shares of common
stock to six investors resident outside the United States for an aggregate
purchase price of $800,000 Canadian.
9. In April, 1998, the Company issued an aggregate of 168,000 shares of
common stock (at a rate of $0.60 Canadian of principal indebtedness per share)
to the following firms resident in Canada in cancellation of certain
indebtedness of the Company to them: Martyn Element & Associates Corporate &
Project Finance Limited and Alexander, Holburn, Beaudin & Lang.
10. In July, 1998, the Company issued an aggregate of 415,000 shares of
common stock to three officers resident in Canada upon exercise of stock options
for an aggregate exercise price of $249,000 Canadian.
29
<PAGE>
11. In November, 1998, the Company granted options to purchase an
aggregate of 220,000 shares of common stock at an exercise price of $.60
Canadian per share to an officer and a director, both resident in Canada.
12. In February, 1999, the Company issued an aggregate of 1,454,545 shares
of common stock to six investors resident outside the United States upon the
exercise of stock warrants for an aggregate exercise price of $800,000 Canadian.
13. In April, 1999, the Company granted an option to purchase 100,000
shares of common stock at an exercise price of $.70 Canadian per share to an
officer resident in Canada.
14. In April, 1999, the Company issued 100,000 shares of common stock to
an officer resident in Canada upon the exercise of stock options at an aggregate
exercise price of $60,000 Canadian.
15. In July, 1999, the Company granted an option to purchase 20,000 shares
of common stock at an exercise price of $.85 Canadian per share to a consultant
to the Company resident in England.
16. In September, 1999, the Company granted an option to purchase 150,000
shares of common stock at an exercise price of $.70 Canadian per share to a
consultant to the Company resident in Canada.
17. The Company is obligated, upon regulatory approval by the Vancouver
Stock Exchange, to grant to Daiwa Seiko of Japan an option to purchase 300,000
shares of the Company's common stock at an exercise price equal to the closing
price on September 16, 1999.
For paragraphs 1 - 17 under the Non-United States Residents heading, there
were no underwriters used and the registrant relied upon the exemptions provided
by Regulation S and/or Section 4(2) of the Securities Act. All references are
to Canadian dollars.
ITEM 11. DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
common stock, no par value ("Common Stock").
30
<PAGE>
Common Stock
The holders of Common Stock are entitled to one vote for each share on
all matters submitted to a vote of the shareholders and are entitled to receive
such dividends, if any, as may be declared by the Board of Directors from time
to time out of legally available funds. Upon liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share in all
assets of the Company that are legally available for distribution. The holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares are fully paid and nonassessable.
As of December 31 1999, there were 22,426,486 shares of Common Stock
issued and outstanding, held of record by approximately 1,100 persons.
At its Annual General Meeting on May 19, 1999, the shareholders of the
Company authorized the Board of Directors to approve a reverse stock split of
both the authorized and issued share capital of the Company using a ratio of
4:1, such that the authorized shares would be reduced to 12,500,000 from
50,000,000, and the issued shares would be reduced from 22,426,486 to
approximately 5,597,246 shares if and when the reverse stock split is authorized
by the Board of Directors, assuming a 4:1 reverse split. The shareholders also
approved a post-consolidation increase in the authorized capital of the Company
to 50,000,000 common shares. As of September 30, 1999, the Board has not
proceeded with any share consolidation.
Stock Transfer Agent
The Company's transfer agent and registrar is Pacific Corporate Trust
Company, 625 Howe Street, Vancouver, British Columbia, Canada V6C 3B8.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company Act for the Province of British Columbia, Canada, the
jurisdiction for which the Company is incorporated and the Company's Articles
govern the indemnification of directors. Section 128 of the Company Act permits
a company to, with the approval of the court, indemnify a director against all
costs, charges and expenses because of being or having been a director,
including an action brought by the company or corporation if:
the person acted honestly and in good faith with the best
interests of the corporation of which the person is or was a
director, and
in the case of a criminal or administrative action or
proceeding, the person had a reasonable grounds for believing
that the person's conduct was lawful.
The Company's Articles contain the following regarding the personal
liability of a director to the extent approved by the Court pursuant to the
Company Act:
31
<PAGE>
11.1 The Company shall indemnify any director, officer, employee or
agent of the Company who was or is a party or is threatened to
be made a party to any threatened, pending or completed action
or proceeding and whether civil, criminal or administrative,
by reason of the fact that he is or was a director, officer,
employee or agent of the Company or any act or thing occurring
at a time when he is or was serving at the request of the
Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against all costs, charges and expenses, including
legal fees and any amount paid to settle the action or
proceeding or satisfy judgment, if he acted honestly and in
good faith with a view of the best interest of the corporation
or other legal entity or enterprise as aforesaid of which he
is or was a director, officer, employee or agent, as the case
may be, and exercise the case, diligence and skill of a
reasonably prudent person, and with respect to any criminal or
administrative action or proceeding, he had reasonable grounds
for believing that his conduct was lawful; provided that no
indemnification of a director or former director of the
Company, or director or former director of a corporation in
which the Company is or was a shareholder, shall be made
accepted to the extent approved by the court pursuant to the
Company Act or any other statute. The determination of any
action, suit or proceeding by judgment, order, settlement,
conviction or otherwise shall not of itself, create a
presumption that the person did not act honestly and in good
faith and in the best interests of the Company and did not
exercise the care, diligence and skill of a reasonably prudent
person and, with respect to any criminal action or proceeding,
did not have a reasonable grounds to believe that the conduct
was lawful.
11.2 The Company shall indemnify any person in respect of any loss,
damage, costs or expenses whatsoever incurred by him while
acting as an office, employee or agent for the Company unless
such loss, damage, costs or expenses shall arise out of the
failure to comply with instructions, willful act or default or
fraud by such person, in any of which events the Company shall
only indemnify such persons if the directors, in their
absolute discretion so decide or the Company by ordinary
resolution so direct.
11.3 The indemnification provided by this part shall not be deemed
exclusive of any other rights to which those seeking
indemnification may be entitled under any other part, or any
valid and lawful agreement, vote of members or disinterested
directors or otherwise, both as to actions in his official
capacity and as to actions in another capacity while holding
such office, and shall continue as to a person who has ceased
to be a director, office, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such
person. The indemnification provided by this article shall not
be exclusive of any powers, rights, agreements or undertakings
which may be allegedly permissible or authorized by or under
any applicable law. Notwithstanding any other provisions set
forth in this part, the indemnification authorized by this
part shall be
32
<PAGE>
applicable only to the extent that any such indemnification
shall not duplicate indemnity or reimbursement which that
person has received or shall receive otherwise than under this
part.
11.4 The directors are authorized from time to time to cause the
Company to give indemnities to any director, officer,
employee, agent or other person who has undertaken or is about
to undertake any liability on behalf of the Company or any
corporation controlled by it.
11.5 Subject to the Company Act, no director or officer or employee
for the time being of the Company shall be liable for the
acts, receipts, neglects or defaults of any other director or
officer or employee, or for joining in any receipt or act for
conformity, or for any loss, damage or expense happening to
the Company through the insufficiency or deficiency of title
to any property acquired by order of the Board for the Company
or for the insufficiency or deficiency of any security in or
upon which any of the moneys of or belongings to the Company
shall be invested or for any loss or damages arising from the
bankruptcy, insolvency or tortious act of any person, firm or
corporation with whom any moneys, securities or effects shall
be lodged or deposited or for any loss occasioned by any error
of judgment or oversight on his part or for any other loss,
damage or misfortune whatever which may happen in the
execution of the duties of his respective office or trust or
in relation thereto unless the same shall happen by or through
his own willful act or default, negligence, breach of trust or
breach of duty.
11.6 Directors may rely upon the accuracy of any statement of fact
represented by an officer of the Company to be correct or upon
statements in a written report of the auditor of the Company
and shall not be responsible or have liability for any loss or
damage resulting from the paying of any dividends or otherwise
acting in good faith upon any such statement.
11.7 The directors may cause the Company to purchase and maintain
insurance for the benefit of any person who is or was a
director, officer, employee or agent of the Company is or was
serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability
incurred by him as a director, office, employee or agent.
The Company has a currently effective directors' and officers'
liability insurance policy.
33
<PAGE>
ITEM 13. FINANCIAL STATEMENTS
Consolidated Financial Statements of
CARBITE GOLF INC.
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
AUDITORS' REPORT
To the Shareholders of Carbite Golf Inc.
We have audited the consolidated balance sheets of Carbite Golf Inc. as at
December 31, 1999 and 1998 and the consolidated statements of operations
and deficit and cash flows for each of the years in the three year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December
31, 1999 and 1998 and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 1999, in
accordance with Canadian generally accepted accounting principles. As
required by the Company Act (British Columbia), we report that, in our
opinion, these principles have been applied on a consistent basis.
Canadian generally accepted accounting principles vary in certain
significant respects from accounting principles generally accepted in the
United States. Application of accounting principles generally accepted in
the United States would have affected results of operations and cash flows
for each of the years in the three year period ended December 31, 1999 and
the shareholders' equity as at December 31, 1999 and 1998 to the extent
summarized in Note 11 to the consolidated financial statements.
KPMG LLP
Chartered Accountants
Abbotsford, Canada
March 20, 2000
34
<PAGE>
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 660,669 $ 1,154,678
Accounts receivable 2,368,863 1,304,595
Inventory (Note 3) 2,381,585 1,999,251
Prepaid expenses 285,641 204,029
Future tax assets (Note 8) 148,000 -
---------------------------------------------------------------------------------------------------------
5,844,758 4,662,553
Capital assets (Note 4) 620,344 385,106
Patents and trademarks, net of accumulated
amortization of $86,333 (1998 - $68,603) 90,992 76,000
Deferred costs, net of accumulated amortization of
$732,895 (1998 - $500,783) 254,882 353,766
Goodwill, net of accumulated amortization of $625,481
(1998 - $335,481) 2,222,804 2,512,804
-----------------------------------------------------------------------------------------------------------------
$ 9,033,780 $ 7,990,229
Liabilities and Shareholders' Equity
Current liabilities:
Bank loan $ 191,925 $ -
Accounts payable and accrued liabilities 775,950 615,488
Current portion of long-term debt (Note 5) 14,152 12,960
Income taxes payable (Note 8) 227,872 -
---------------------------------------------------------------------------------------------------------
1,209,899 628,448
Long-term debt (Note 5) 29,873 44,590
Future tax liability (Note 8) 5,000 -
Shareholders' equity:
Share capital (Note 6) 10,454,721 9,777,421
Deficit (2,665,713] (2,460,230)
---------------------------------------------------------------------------------------------------------
7,789,008 7,317,191
Commitments (Note 12)
-----------------------------------------------------------------------------------------------------------------
$ 9,033,780 $ 7,990,229
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
<TABLE>
<CAPTION>
Year end December 31
1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 2(a)) $ 18,510,901 $ 15,638,390 $ 2,268,438
Cost of sales 9,468,562 6,679,384 1,163,467
---------------------------------------------------------------------------------------------------------------------
Gross margin 9,042,339 8,959,006 1,104,971
Operating expenses:
Selling 6,216,698 6,454,481 1,198,822
Research and development 560,616 345,900 95,536
General and administrative 1,896,688 1,224,768 655,830
-------------------------------------------------------------------------------------------------------------
8,674,002 8,025,149 1,950,188
---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 368,337 933,857 (845,217)
Other income (expenses):
Printing operations (Note 7) - (52,025) (24,077)
Gain on dissolution of subsidiary (Note 7) 66,673 - -
Equity in loss of Carbite, Inc. - - (226,240)
Amortization of deferred costs (232,112) (227,400) (163,102)
Amortization of goodwill, patents and trademarks (307,730) (304,460) (99,624)
Interest and other 4,941 2,959 18,515
Loss on disposal of assets - (57,954) -
Foreign exchange loss (6,992) (3,658) (11,712)
--------------------------------------------------------------------------------------------------------------
(475,220) (642,538) (506,240)
---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (106,883) 291,319 (1,351,457)
Income tax provision (Note 8):
Current 241,600 52,800 -
Deferred (143,000) - -
----------------------------------------------------------------------------------------------------------------
98,600 52,800 -
---------------------------------------------------------------------------------------------------------------------
Net income (loss) (205,483) 238,519 (1,351,457)
Deficit, beginning of year (2,460,230) (2,698,749) (1,347,292)
---------------------------------------------------------------------------------------------------------------------
Deficit, end of year $ (2,665,713) $ (2,460,230) $ (2,698,749)
=====================================================================================================================
Earnings (loss) per share (Note 10) $ (0.01) $ 0.0 $ (0.11)
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in)
Operations:
Net income (loss) $ (205,483) $ 238,519 $(1,351,457)
Add (deduct):
Items not affecting working capital:
Depreciation 165,752 98,979 23,129
Deferred income tax (143,000)
Equity in loss (earnings) of Carbite Inc. - - 226,240
Amortization 539,842 531,860 262,726
Gain on dissolution of subsidiary (66,673) - -
Loss on disposal of capital assets - 57,954 -
Net changes in non-cash working capital
balances relating to operations:
Accounts receivable (1,088,887) (773,684) 320,139
Inventory (382,334) 72,416 18,735
Prepaid expenses (82,003) (61,033) 126,813
Accounts payable and accrued liabilities 252,145 (154,032) (289,488)
Income taxes payable 227,872 - -
-------------------------------------------------------------------------------------------------------------
(782,769) 10,979 (663,163)
Investments:
Net cash acquired on purchase of subsidiary
(Note 2(a)) - - 13,454
Proceeds on sale of marketable securities - - 29,184
Deferred costs incurred (133,228) (80,900) (46,627)
Patent and trademark costs incurred (32,722) (66,479) -
Purchase of capital assets (400,990) (256,467) (35,254)
Proceeds on disposal of capital assets - 19,837 -
-------------------------------------------------------------------------------------------------------------
(566,940) (384,009) (39,243)
Financing:
Issuance of common shares, net share of
subscriptions 677,300 842,047 1,189,011
Proceeds on convertible debenture - 500,000 -
Repayment of convertible debenture - (250,000) -
Proceeds on long-term debt - 60,000 -
Repayments on long-term debt (13,525) (2,450) -
Decrease in promissory note receivable - - 80,257
Advances to associated companies - - (1,036,029)
Decrease in lease obligation - (6,857) (3,610)
Increase (decrease) in bank loan (net) 191,925 (18,846) (9,160)
-------------------------------------------------------------------------------------------------------------
855,700 1,123,894 220,469
--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash during the year (494,009) 750,864 (481,937)
Cash and cash equivalents, beginning of year 1,154,678 403,814 885,751
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 660,669 $ 1,154,678 $ 403,814
====================================================================================================================
Supplementary cash flow information:
Interest paid $ 25,562 $ 44,226 $ 3,516
=========== ============= =============
Income taxes paid $ 53,600 $ 9,223 $ -
=========== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
37
<PAGE>
1. Operations:
The Company is incorporated under the laws of British Columbia, Canada and
its primary business activity is the development and sales of a proprietary
brand of golf clubs. The Company's operations are located in San Diego,
California, U.S.A.
2. Significant accounting policies:
(a) Basis of presentation:
The consolidated financial statements are prepared in accordance
Canadian generally accepted accounting principles which conform in all
material respects with accounting principles generally accepted in the
United States, except as disclosed in Note 11.
The consolidated financial statements include the accounts of the
Company and the following subsidiaries:
Subsidiary Percentage ownership
---------- --------------------
Carbite, Inc. 100%
AGS Acquisition Corp. 100%
Printer Graphics Inc. 90%
All material intercorporate transactions and balances have been
eliminated upon consolidation.
In 1999, Printer Graphics Inc. was formally dissolved (Note 7).
During the year ended December 31, 1997 the following transactions
occurred:
(i) On August 29, 1997, the Company acquired 90% of the outstanding
shares of Printer Graphics Inc. for $7,615.
(ii) On September 3, 1997 the Company's newly incorporated, wholly-
owned subsidiary, AGS Acquisition Corp., acquired 100% of the
outstanding shares of Advanced Golf Systems Inc. in exchange for
700,000 shares of the Company and 700,000 share purchase
warrants, for a total deemed purchase price of $362,460.
Immediately following the acquisition, Advanced Golf Systems
Inc. was merged into AGS Acquisition Corp.
(iii) On September 3, 1997, the Company's newly incorporated, wholly-
owned subsidiary, Carbite Acquisition Corp., acquired the
remaining 50% of the outstanding shares of Carbite, Inc. in
exchange for 7,078,872 shares of the Company and 912,524 share
purchase warrants, for a total deemed purchase price of
$3,665,435. As part of the purchase, the Company also issued
607,000 share options to a director, who previously held 607,000
options of Carbite, Inc. Immediately following the acquisition,
Carbite, Inc. was merged into Carbite Acquisition Corp. In
fiscal 1999, Carbite Acquisition Corp. changed its name to
Carbite Inc.
These transactions have been accounted for using the purchase method
with the results
38
<PAGE>
of operations of the acquired subsidiaries included in the
financial statements from the dates of acquisition. Aggregate
acquisition costs of $3,260,256 were allocated as follows:
<TABLE>
<CAPTION>
==================================================================================================
Printer Graphics Advanced Golf Carbite
Inc. Systems Inc. Inc.
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets acquired:
Non-cash current assets $ 75,399 $ 15,000 $3,112,748
Capital assets 45,038 - 245,135
Investment in joint venture - 944,077 -
Goodwill 12,325 (589,138) 2,974,384
Deferred costs - - 148,647
--------------------------------------------------------------------------------------------------
132,762 369,939 6,480,914
Liabilities assumed:
Current liabilities 98,913 9,036 902,367
Non-current liabilities 47,303 - 1,004,005
50% Existing equity ownership - - 1,661,735
--------------------------------------------------------------------------------------------------
146,216 9,036 3,568,107
--------------------------------------------------------------------------------------------------
Net non-cash assets acquired $ (13,454) $360,903 $2,912,807
==================================================================================================
</TABLE>
Advanced Golf Systems Inc. held a 49% interest in the Viper
Bite joint venture with Carbite Inc., which held the other 51%
interest. This joint venture was effectively terminated upon
the completion of these acquisitions.
The consolidated statement of operations for 1997 reflect only
the post acquisition earnings of Carbite, Inc.
(b) Cash and cash equivalents:
Cash and cash equivalents include all cash balances and highly
liquid investments with an original maturity date of three
months or less.
(c) Inventory:
Inventory is valued at the lower of cost and net realizable
value.
(d) Investment in Carbite, Inc.:
From March 15, 1996 up to the completion of the acquisition of
Carbite, Inc. (Note 2(a)), the investment in Carbite, Inc. was
accounted for using the equity method. Prior to March 15, 1996,
the investment was accounted for using the cost method. Under
the equity method, the original cost of the shares was adjusted
for the Company's share of post-acquisition earnings or losses
less dividends. The excess of the cost of the shares of
Carbite, Inc. over the net book values of the net assets on the
date of acquisition amounted to $538,481. This excess related
to the goodwill and certain intangible assets of Carbite, Inc.
and was being amortized on a straight-line basis over ten
years. Upon the completion of the acquisition, the unamortized
balance was added to goodwill.
39
<PAGE>
(e) Deferred costs:
Deferred costs are related to the development and promotion of
the products of Carbite, Inc. The costs are being amortized on a
straight-line basis over a maximum five year period, depending on
the nature of the costs.
(f) Capital assets:
Capital assets are stated at cost. Depreciation is provided over
the estimated useful lives of the assets.
(g) Goodwill:
Goodwill, representing the excess of cost over net assets of
subsidiaries acquired and certain intangible assets purchased, is
amortized using the straight-line method over ten years. The
Company assesses the continuing value of goodwill each year by
considering current operating results, trends, and prospects. In
the year of an impairment in value, the goodwill will be reduced
by a charge to earnings.
(h) Patents and trademarks:
Patents and trademarks represent all costs incurred to obtain
these intangible assets. The patents and trademarks are amortized
using the straight-line method over ten years. The Company
assesses the continuing value of patents and trademarks each year
by considering operating results, trends, and prospects. In the
year of an impairment in value, the patents will be reduced by a
charge to earnings.
(i) Foreign currency translation:
The Company has adopted the United States dollar as its reporting
currency, which is also its functional currency. The Company and
its subsidiaries are considered to be integrated operations and
the accounts are translated using the temporal method. Under this
method, monetary assets and liabilities are translated at the
rates of exchange in effect at the balance sheet date; non-
monetary assets at historical rates and revenue and expense items
at the average rates for the period other than depreciation and
amortization which are translated at the same rates of exchange
as the related assets. The net effect of the foreign currency
translation is included in current operations.
(j) Revenue recognition:
Revenue is recognized on shipment of finished goods.
(k) Income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under this method, future tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Future tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is
40
<PAGE>
recognized in income in the period that includes the enactment
date.
(l) Use of estimates:
These financial statements have been prepared in accordance with
Canadian generally accepted accounting principles which require
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and 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.
3. Inventory:
=====================================================================
1999 1998
---------------------------------------------------------------------
Raw materials $1,737,788 $ 936,237
Finished goods 643,797 1,063,014
---------------------------------------------------------------------
$2,381,585 $1,999,251
===============================================================================
4. Capital assets:
=====================================================================
1999 1998
---------------------------------------------------------------------
Office and computer equipment $ 364,047 $ 151,523
Manufacturing equipment 609,348 432,936
Automotive equipment 6,785 6,785
Leasehold improvements 32,484 20,430
---------------------------------------------------------------------
1,012,664 611,674
Less: accumulated depreciation 392,320 226,568
---------------------------------------------------------------------
$ 620,344 $ 385,106
=====================================================================
5. Long-term debt:
=====================================================================
1999 1998
---------------------------------------------------------------------
Bank loan, payable in monthly
installments of $1,501 including
interest at bank prime rate plus 1.75%
per annum, due November 2002 $ 44,025 $ 57,550
Less: current portion 14,152 12,960
---------------------------------------------------------------------
$ 29,873 $ 44,590
=====================================================================
41
<PAGE>
Principal repayments for the next three years are as follows:
2000 $14,152
2001 $15,673
2002 $14,200
The Company has also secured an operating line of credit of
$1,000,000. The operating line of credit bears interest at bank prime
rate plus 1% per annum.
The above bank loan and operating line of credit, are secured by
assignment of inventories, accounts receivable, equipment and
assignment of insurance proceeds.
6. Share capital:
Authorized:
50,000,000 Common shares with no par value
<TABLE>
<CAPTION>
Issued:
===================================================================================================
Number
Of shares Amount
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1996 9,118,536 $ 4,195,684
Issued in 1997:
For cash 530,000 434,826
For acquisition of subsidiaries 7,778,872 4,027,895
For services 150,000 26,969
---------------------------------------------------------------------------------------------------
Balance, December 31, 1997 17,577,408 8,685,374
Escrow shares cancelled (Note 6(a)) (125,000) -
Issued in 1998:
For cash (net of financing costs of $92,770) 2,044,617 691,537
For settlement of debt 358,666 150,510
For conversion of debenture 678,750 250,000
---------------------------------------------------------------------------------------------------
Balance, December 31, 1998 20,534,441 9,777,421
Issued in 1999:
For cash (net of offering costs of $6,265) 1,892,045 677,300
---------------------------------------------------------------------------------------------------
Balance, December 31, 1999 22,426,486 $ 10,454,721
===================================================================================================
</TABLE>
(a) Escrow shares:
As at December 31, 1997, 125,000 of the issued shares were held
subject to an escrow agreement. The approval of the regulatory
authorities was required for the transfer or release of these
shares. In fiscal 1998, these shares were cancelled for nil
proceeds.
(b) Share options:
42
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Number Price range
of options (CAD $'s)
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1996 325,000
Granted 1,527,500 $0.75 to 1.50
Granted 607,000 $0.01
Exercised (80,000) $0.60
Cancelled/expired (20,000) $0.69
-------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,359,500
Granted 1,071,500 $0.60 to $0.80
Exercised (482,500) $0.60
Cancelled/expired (537,260) $0.60
-------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,411,240
Granted 1,120,000 $0.70 to $0.90
Granted 180,000 $0.42
Exercised (250,000) $0.60
Cancelled/expired (517,000) $0.60 to $0.85
-------------------------------------------------------------------------------------------------
Balance, December 31, 1999 2,944,240
-------------------------------------------------------------------------------------------------
</TABLE>
During fiscal 1998, a resolution was passed to reprice all outstanding
share options to CAD $0.60.
The following share options were outstanding at December 31, 1999:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Number Exercise Expiry
of Shares Price Date
--------------------------------------------------------------------------------------------------------
(CAD$)
<S> <C> <C> <C>
Employees 153,000 0.80 April 14, 2000
Employee 150,000 0.70 September 15, 2000
Directors 179,240 0.60 October 1, 2002
Employees 118,500 0.60 October 1, 2002
Employees 7,500 0.60 December 9, 2002
Director 607,000 0.01 March 1, 2003
Directors 220,000 0.60 March 3, 2003
Employees 559,000 0.60 March 3, 2003
Employee 100,000 0.70 December 19, 2003
Employee 2,500 0.77 March 23, 2004
Director 247,500 0.77 March 23, 2004
Director 270,000 0.85 March 26, 2004
Employee 100,000 0.90 April 19, 2004
Employee 50,000 0.70 June 25, 2004
Employees 180,000 0.42 December 31, 2004
--------------------------------------------------------------------------------------------------------
2,944,240
--------------------------------------------------------------------------------------------------------
</TABLE>
No compensation resulted in the granting of these options.
(c) Share purchase warrants:
The following share purchase warrants were outstanding at December 31,
1999:
43
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Number Exercise Expiry
of Shares Price Date
-------------------------------------------------------------------------------------------------
(CAD$)
<S> <C> <C> <C>
Warrants 678,750 0.52 November 30, 2000
Warrants 112,500 0.40 January 25, 2000
0.52 January 25, 2001
-------------------------------------------------------------------------------------------------
791,250
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
7. Printing operations:
-----------------------------------------------------------------------------------------------------
Six months ended Four months ended
June 30, 1998 December 31, 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $128,492 $114,782
Cost of sales 95,856 73,298
-----------------------------------------------------------------------------------------------------
32,636 41,484
General and administrative expenses 84,661 65,561
-----------------------------------------------------------------------------------------------------
Loss from printing operations $(52,025) $ (24,077)
-----------------------------------------------------------------------------------------------------
</TABLE>
In June 1998 the Company ceased its printing operations.
In fiscal 1999, the Company formally dissolved its subsidiary,
Printer Graphics Inc., resulting in a gain on dissolution of
$66,673 for accounting purposes.
--------------------------------------------------------------------------------
8. Income taxes:
The Company's provision (recovery) for income taxes differs from
the amounts computed by applying the combined U.S. federal and
state income tax rate of 43% for the following reasons:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision (recovery) at the
statutory rate $ (45,960) $ 125,267 $(581,127)
Increase (decrease) in valuation allowance
for net future tax assets 92,526 (219,801) 489,709
Adjustment for printing operation and loss
on disposal of assets (28,669) 47,291 10,353
Amortization of non-deductible goodwill 124,700 124,700 41,710
Non-deductible expenses and other (43,997) (24,657) 39,355
-----------------------------------------------------------------------------------------------------
Actual tax provision $ 98,600 $ 52,800 $ -
-----------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to
significant portion of the future tax
44
<PAGE>
assets and future tax liabilities at December 31, 1999 and 1998 are
presented as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Future tax assets:
Non capital loss carryforwards:
Canadian $ 762,110 $ 619,186
U.S. - 58,687
------------------------------------------------------------------------------------------------
762,110 677,873
Unclaimed Canadian research and development
Expenditures 141,218 132,929
U.S. current future tax assets 148,000 -
-----------------------------------------------------------------------------------------------------
Total gross future tax assets 1,051,328 810,802
Less: valuation allowance (903,328) (810,802)
-----------------------------------------------------------------------------------------------------
Net future tax assets $ 148,000 $ -
-----------------------------------------------------------------------------------------------------
Future tax liability:
Capital assets and patents $ 5,000 $ -
-----------------------------------------------------------------------------------------------------
Net future tax liability $ 5,000 $ -
-----------------------------------------------------------------------------------------------------
</TABLE>
The Company has losses for tax purposes of approximately CAD
$2,558,000 which are available to offset future years' taxable
income in Canada expiring as follows:
2000 CAD $ 113,000
2001 97,000
2002 172,000
2003 475,000
2004 941,000
2005 268,000
2006 492,000
---------
CAD $2,558,000
=========
The Company has unclaimed research and development expenditures of
approximately CAD $474,000 which can be deducted for income tax
purposes in Canada in future years at the Company's discretion.
9. Related party transactions:
The following amounts were charged by directors and officers of the
Company:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wages and fees to directors $ - $ 14,231 $ 41,528
Management salaries paid to
directors post Carbite, Inc.
acquisition (Note 2(a)) $ 327,500 $ 375,215 $ 70,486
Royalties paid to a director post
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C> <C>
Carbite, Inc. acquisition
(Note 2(a)) $ 174,367 $ 168,445 $ 30,199
Legal fees paid to directors $ 8,000 $ - $ -
Consulting fees paid to a company
controlled by a director
$ - $ - $ 30,000
Wages and fees paid to an officer
$ 117,668 $ 84,537 $ 20,945
Interest paid to directors $ - $ 3,548 $ -
-----------------------------------------------------------------------------------------------------
</TABLE>
These transactions occurred in the normal course of operations and
are measured at the exchange amount, which is the amount of the
consideration established and agreed to by the related parties.
10. Earnings (loss) per share:
The earnings per share figures are calculated using the weighted
average monthly number of shares outstanding during the respective
fiscal years, which was 22,117,367 in 1999, 19,074,032 in 1998, and
12,186,147 in 1997. The effect of the exercise of share options and
share purchase warrants outstanding is antidilutive in 1999, not
materially dilutive in 1998 and antidilutive in 1997.
11. Differences between generally accepted accounting principles in
Canada and the United States:
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada
(Canadian GAAP) which differ in certain respects from those
principles and practices that the Company would have followed had
its consolidated financial statements been prepared in accordance
with accounting principles and practices generally accepted in the
United States (U.S. GAAP).
Had the Company followed U.S. GAAP, the deferred cost section of
the balance sheet contained within the consolidated financial
statements would have been reported as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1999 1998
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred costs (Note 11(a)) $ 254,882 $ - $ 353,766 $ -
-----------------------------------------------------------------------------------------------------
</TABLE>
Had the Company followed U.S. GAAP, the shareholders' equity
section of the balance sheet contained within the consolidated
financial statements would have been reported as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1999 1998
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholders' equity:
Share capital $10,454,721 $10,454,721 $9,777,421 $9,777,421
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Deficit (Note 11(a)) (2,665,713) (2,920,595) (2,460,230) (2,813,996)
-----------------------------------------------------------------------------------------------------------------
$ 7,789,008 $ 7,534,126 $ 7,317,191 $ 6,963,425
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Had the Company followed U.S. GAAP, the statement of operations
contained within the consolidated financial statements would have
been reported as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations
under Canadian GAAP $ 368,337 $ 933,857 $ (845,217)
Printing operations (Note 11(b)) - (52,025) (24,077)
Amortization of goodwill, patents
and trademarks (Note 11(b)) (307,730) (304,460) (99,624)
Deferred costs incurred (Note 11(a)) (133,228) (80,900) (73,596)
-------------------------------------------------------------------------------------------------------
Income (loss) from operations
under U.S. GAAP $ (72,621) $ 496,472 $ (1,042,514)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------
Net income (loss) under
Canadian GAAP $(205,483) $ 238,519 $ (1,351,457)
Deferred costs incurred (Note 11(a)) (133,228) (80,900) (73,596)
Amortization of deferred costs
(Note 11(a)) 232,112 227,400 163,102
-------------------------------------------------------------------------------------------------------
Net income (loss) under U.S.
GAAP $(106,599) $ 385,019 $ (1,261,951)
-------------------------------------------------------------------------------------------------------
</TABLE>
Had the Company followed U.S. GAAP, the statements of cash flows
contained within the consolidated financial statements would have
been reported as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in) operating
activities under Canadian GAAP $ (782,769) $ 10,979 $ (663,163)
Deferred costs incurred
(Note 11(a)) (133,228) (80,900) (46,627)
-------------------------------------------------------------------------------------------------------
Cash used in operating activities
under U.S. GAAP $ (915,997) $(69,921) $ (709,790)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
1999 1998 1997
</TABLE>
47
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash used in investing activities
under Canadian basis $(566,940) $(384,009) $ (39,243)
Deferred costs incurred
(Note 11(a)) 133,228 80,900 46,627
-------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing
activities under U.S. basis $(433,712) $(303,109) $ 7,384
-------------------------------------------------------------------------------------------------------
</TABLE>
(a) Deferred costs:
Under U.S. GAAP, the expenditures that were deferred and
amortized under Canadian GAAP would have been expensed in
the year incurred against operations and accordingly, there
would be no amortization of deferred costs.
(b) Income from operations:
Under U.S. GAAP, amortization expenses, along with loss from
printing operations, would be included in income from
operations, rather than reported separately as non-operating
expenses.
12. Commitments:
(a) Royalty agreement:
The Company has a royalty agreement with one of the
directors, which pays a fixed fee per club sold in exchange
for the exclusive assignment of all the patents made by the
director. It also pays 1/3 of royalties received by the
Company from competitors using the Company's patented
technology.
(b) Endorsement agreement:
In 1999, the Company signed a six year endorsement
agreement, which gives the Company unlimited worldwide use
of the endorser's name and likeness in promotions for the
Company and its products. The endorser also agrees to
publicly use Carbite products while competing at PGA events,
and participate in promotional activities the Company
arranges.
As consideration, the Company agrees to pay the endorser the
following amounts, in cash and in shares:
Year Cash Shares
---- ---- ------
2000 $ 200,000 100,000
2001 $ 200,000 100,000
2002 $ 275,000 225,000
2003 $ 300,000 250,000
2004 $ 325,000 250,000
The contract can be terminated by the Company if certain
sales figures are not met or if the endorser in unable to
fulfill his duties.
48
<PAGE>
(c) Trademark license and distribution agreements:
In September 1999, the Company entered into two agreements
with Daiwa Seiko of Japan:
(i) A Trademark License Agreement which permits the Company
to use the Daiwa name and other trademarks of Daiwa on
golf products in the Unites States. The term is five
years with an option for an additional five-year term.
The Company is obligated to pay a royalty of 6% of the
Company's FOB purchase price on all products sold under
the license. The agreement is subject to termination
upon certain events, including failure to meet certain
minimum royalty amounts ($75,000 in Year 1, $225,000 in
Year 2, $250,000 in Year 3, $375,000 in Year 4 and
$450,000 in Year 5).
(ii) A Distribution Agreement which designates the Company
as the exclusive distributor of Daiwa golf products in
the United States for a term of five years with an
option to renew for an additional five years. The
agreement is subject to termination upon certain
events, including the failure for two consecutive years
to undertake to meet certain minimum purchase
obligations, which begin at $1.75 million for the first
year of the agreement and escalate substantially each
year thereafter. The agreement grants Daiwa an option,
exercisable through September 2002, to by 300,000
shares of the Company's common stock at fair market
value. The Company must also pay 10% of Daiwa net sales
for advertising and promotion of Daiwa products in the
United States.
13. Fair value of financial instruments:
For certain of the Company's financial instruments including
accounts receivable and accounts payable and accrued liabilities,
the carrying amounts approximate fair value due to the immediate
or short-term maturity of these financial instruments.
The carrying value for long-term debt approximates fair value
because the borrowing rate is similar to the rates currently
available to the Company for loans with similar terms and
maturity.
14. Reclassification:
Certain of the prior years' figures have been reclassified to
conform to the presentation adopted in the current year.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
49
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
The following Financial Statements of the Company are included in this
Registration Statement:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1998, 1997 and 1996
Consolidated Statements of Operations and Deficit for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Financial Position for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
b. Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION
--------------------------
*2.1 Agreement and Plan of Merger between Carbite, Inc., Carbite Golf, Inc.
and Carbite Acquisitions Corp. dated June 6, 1996
*2.2 Agreement between Advanced Golf Systems, Inc. and Carbite Golf, Inc.
dated September 24, 1996
*3.1 Amended and Restated Articles of Incorporation and Bylaws of the
Company
*4.1 Specimen Common Stock Certificate
*4.2 Form of Warrant
*10.1 Royalty Agreement between Carbite, Inc. and C. S. Shira dated March 1,
1993
*10.2 Employment Agreement between the Company and Chester S. Shira dated
September 3, 1997
*10.3 Employment Agreement between the Company and Michael A. Spacciapolli
dated September 3, 1997
50
<PAGE>
*10.4 License Agreement between Carbite Golf Company and Taylor Made Golf
dated January 1, 1995 and Amendment dated March 4, 1997
*10.5 License Agreement between Carbite, Inc. and K Z Golf, Inc. dated
October 28, 1998
*10.6 Endorsement Agreement between Carbite Golf, Inc., Carbite, Inc. and
Fuzzy Zoeller Productions, Inc. dated August 20, 1999
*10.7 Agreement and Plan of Merger between Carbite, Inc., Carbite Golf, Inc.
and Carbite Acquisition Corp. dated June 6, 1996
*10.8 Agreement between Advanced Golf Systems, Inc. and Carbite Golf, Inc.
dated September 24, 1996
*10.9 Loan Agreement dated April 13, 1998 between the Company and James A.
and Susan V. Henderson as Co-Trustees of the Henderson Living Trust
*10.10 Lease Agreement dated January 6, 1998 between Carbite, Inc. and Nancy
Ridge Technology Center, LLC relating to the facilities at 6330 Nancy
Ridge Road, San Diego, CA 92121
*10.11 Form of Stock Option Agreement
*10.12 Employee Confidentiality and Invention Agreement
*10.13 Commercial Security Agreement between Carbite, Inc. and Scripps Bank
dated May 15, 1999
*10.14 Trademark License Agreement between Carbite Golf, Inc. and Daiwa
Seiko, Inc. dated September 16, 1999
*10.15 Exclusive Distribution Agreement between Carbite Golf, Inc. and Daiwa
Seiko, Inc. dated September 16, 1999
**10.16 Lease Agreement between Manufacturers Life Insurance and Carbite, Inc.
dated October 29, 1999 relating to facilities at 9985 Huennekens
Street, San Diego, CA 92121
*13. Form F-X Appointment of Agent for Service of Process and Undertaking
**27. Financial Data Summary
*Previously filed and incorporated herein by reference
**Filed herewith
51
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARBITE GOLF, INC.
Date: October 15, 2000 By: /s/ John R. Pierandozzi
-----------------------
John R. Pierandozzi
Chief Executive Officer
52
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John R. Pierandozzi and Chester S. Shira, or
either of them, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John R. Pierandozzi Director and Chief Executive Officer September 20, 2000
-----------------------
John R. Pierandozzi
/s/ Michael A. Spacciapolli Vice Chairman of the Board September 20, 2000
---------------------------
Michael A. Spacciapolli
/s/ Chester S. Shira Chairman of the Board and Director of
--------------------
Chester S. Shira Research and Development September 20, 2000
/s/ David Nairne Director September 20, 2000
----------------
David Nairne
/s/ Ballard F. Smith Director September 20, 2000
--------------------
Ballard F. Smith
/s/ David A. Williams Director September 20, 2000
---------------------
David A. Williams
</TABLE>
53
