<PAGE>
As filed with the Securities and Exchange Commission on January 13, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
AMENDMENT NO. 1 TO THE
FORM 10-SB
________________________
GENERAL FORM OF REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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.)
6330 NANCY RIDGE DRIVE, SUITE 107
SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip code)
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
(Title of class)
<PAGE>
PART I
Forward-Looking Statements
This document contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
These forward-looking statements are based on management's expectations as
of the date hereof, and the Company does not undertake any responsibility to
update these statements in the future. Actual future performance and results
could differ materially from those contained in or suggested by these forward-
looking statements as a result of the factors set forth in this Form 10-SB,
including without limitation the disclosures made under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Factors That May Affect Future Results and Financial Condition"
and the other risks detailed in the Company's reports to be filed with the
Securities and Exchange Commission.
DESCRIPTION OF BUSINESS
Overview
Carbite Golf, Inc. (the "Company"), through its wholly-owned subsidiary
Carbite, Inc., designs, develops, and markets high quality innovative golf clubs
based on its proprietary powder metallurgy technology. The products currently
include wedges, putters, utility woods, wood sets and iron sets.
The Company does not manufacture the principal components of its clubs
(clubheads, shafts, and grips), but purchases the components from outside
suppliers and then assembles, packages and ships the products at the San Diego,
California headquarters.
The Company markets and sells its 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 is a holding company and all of the golf club operations
described herein are conducted through its wholly-owned subsidiary, Carbite,
Inc.
Organization
The Company was incorporated in 1985 in British Columbia, Canada under the
name Q Data Systems, Inc. In 1986, the Company conducted a public offering in
Canada only. Its stock has been publicly traded on the Vancouver Stock Exchange
since 1986. The current trading symbol is "CAB".
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, the Company completed the acquisition of two privately-
held, California corporations involved in the golf equipment business: (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
2
<PAGE>
partner in a television infomercial selling golf clubs under the name ViperBite.
In connection with these acquisitions, the Company changed its name to Carbite
Golf, Inc., effective January 4, 1996.
By December 31, 1998, the Company's only assets were its ownership of 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 the Company intends to formally dissolve it in 1999.
Proprietary Technology Applied to Golf Clubs
After its incorporation in 1988, Carbite, Inc. began developing products
using the proprietary metallurgical technology developed by its founder, Chester
S. Shira, a metallurgist with an avid interest in golf. Mr. Shira's original
concept was that a tungsten carbide surface inserted on the face of a golf club
would improve performance by increasing ball control through backspin. By 1992,
Mr. Shira had secured six patents and the USGA had approved the inserts as
conforming to the Rules of Golf. Carbite, Inc. introduced its first products in
mid-1992 and by year end 1998 had grown to annual sales of $15 million.
Inserts
The Company's initial innovation was a friction-enhancing insert for irons
designed to increase backspin. The insert combines tungsten carbide particles in
a bronze alloy matrix, creating a slightly abrasive, but durable, club face
designed to create more backspin than traditional non-sandblasted clubs. The
Company believes that greater backspin assists in greater control for players at
all skill levels.
The insert has been primarily applied to wedge products where the Company
believes extra spin is particularly helpful. The inaugural insert product was
the Check-Mate wedge, introduced in 1992, with a traditional head shape/size
offered in four loft configurations. Two other Check-Mate models (CS-100 and
CS-200) were added in 1995. In 1997, the insert technology was extended to two
new products - the Diatanium wedge which combines titanium and diamond particles
designed to decrease weight and increase durability and ball control; and the JS
Series Putters which feature a soft bronze version of the insert designed to
optimize softness of feel and playability.
Taylor Made Golf has licensed the insert for use on its "Tour Wedge"
product. Professional golfers have also used the club in competition - the
Company believes that more than 60 players on the PGA Tour, Senior Tour, LPGA
and Nike Tour currently use wedges which incorporate inserts using Carbite
technology.
Surface Technology and Plating
The Company has developed a surface plating process which is designed for
performance benefits similar to the insert, but which are less expensive to
manufacture. This technology was first used on the ViperBite, an oversized
wedge, which was introduced in mid-1995 through a television infomercial. The
success of the wedge helped create a market for ViperBite iron sets, introduced
in mid-1996.
In March, 1997 the Company launched a utility wood, since discontinued,
called the Gyroseven, which combined the surface plating with a keel-shaped sole
and offset head designed to create an easy-to-hit alternative to the long iron.
This design has since been extended to a full line of Carbite Gear Effect Metal
Woods (1-3-4-5-7-9).
Dual Density - Polar Balanced
The Company is the assignee of all rights to a patent on a process to
fabricate and join dissimilar metals with different densities in a single club.
The Company believes that such technology (which it refers to as "Dual Density")
has significant potential as the industry continues to move toward club heads
with bigger "sweet spots" which are more
3
<PAGE>
forgiving on off-center hits. Dual Density is designed to achieve this by
combining lightweight metals in the hitting area and denser materials in the
heel and toe.
The Company's first application of this technology is to a new family of
Polar Balanced Putters which combine lightweight titanium or aluminum in the
hitting area with dense tungsten in the heel and toe. This combination is
designed to produce an increase in resistance to twisting at the moment of
impact (in metallurgical parlance, the "Moment of Inertia;" in golf parlance, a
bigger "Sweet Spot"). The complete product line (titanium and aluminum models)
was introduced in January, 1998.
The Company believes there are significant opportunities in the production
of full iron sets with the Dual Density process. This opportunity has been
highlighted by the introduction of multiple material irons from various industry
leaders. The Company's first products in this area are its Tungsten Tour Irons
(a full line of irons) which are designed to bias the weight of the club head to
help square the club at impact.
Products
The Company operates in the golf club segment within the golf industry and
offers wedges, putters, irons, and woods. These clubs are designed and priced to
compete at the premium and middle range price levels. The Company sells
substantially all of its golf clubs under the Carbite brand name.
The following table sets forth the contribution to net sales attributable
to the Company's product groups for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
1998 1997 September 30, 1999
--------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Putters $12,370,000 79% $ 428,396 5% $11,522,556 82%
Woods $ 1,942,000 12% $3,632,203 43% $ 505,910 4%
Wedges $ 1,172,000 7% $4,419,319 52% $ 1,766,515 12%
Other $ 178,000 2% $ 0 0% $ 267,652 2%
Net Sales $14,527,670 100% $8,480,111 100% $14,062,633 100%
=========== === ========== === =========== ===
</TABLE>
The Company currently offers the following products:
Polar Balanced Putters
In the Polar Balanced Putter, 70% of the total putter-head weight is
strategically placed at the toe and heel. Tungsten weights, with twice the
density of lead, are molecularly bonded to an ultra light center section of
aluminum. 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
the Company believes make them more accurate and forgiving than other putters.
Polar Balanced Putters are available in four models (ZG, ZH, ZI and ZM),
all with steel or aluminum shafts.
Tour Insert Wedges
The Tour Insert Wedge Series stresses performance through design, materials
and technology. Carbite's patented high-friction insert blends powdered soft
bronze with diamond and tungsten carbide particles designed to
4
<PAGE>
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 (52(degrees)
Approach, 56(degrees) Sand and 60(degrees) Lob) with steel or graphite shafts.
Gear Effect Metal Woods
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. The
Company believes 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.
Tungsten Tour Irons
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.
New Products
For 1999, Carbite introduced an assortment of new products which added to
the wedge and putter lines and expanded the overall product line to include wood
and iron sets: two new models of the Polar Balanced Putter (the ZI and the ZM);
Tour Insert Wedges offered in three configurations; Tungsten Tour Iron Sets; and
Gear Effect Metal Woods offered in six lofts. See Discussion at "Products", page
4-5.
The Polar Balanced Putter accounted for 81.9% and 66% of net sales for the
nine months ended September 30, 1999 and the fiscal year ended December 31,
1998. A decline in the demand for, or a decline in the average selling price of,
these putters would have a material adverse impact on the Company's business,
operations and financial condition.
Product Design and Development
The Company believes that the development of new products and the on-going
enhancement of its product lines are necessary for its growth and success.
Product design at the Company is a result of the integrated efforts of its
product design team, marketing departments and outside manufacturers, all of
which work together to generate new ideas for golf equipment. The Company's
research and development expenses for the nine months ended September 30, 1999,
and for the fiscal years ended December 31, 1998 and 1997 were $341,703,
$345,000 and $243,000,
5
<PAGE>
respectively. The Company intends to invest significant amounts in its research
and development activities through the remainder of 1999 and beyond.
The product design effort is headed by Chester S. Shira, the Company's
Chairman who has over 40 years experience as a metallurgist engineer, and Joe
Sery, Vice President of Engineering, a mechanical engineer and industrial
engineer. The Company also employs on an as-needed basis outside consultants
who work on specific design features of new products.
The design team assimilates ideas from many sources, including professional
golfers, sales personnel, and the marketing department, and incorporates the
golf equipment standards developed by the USGA. Once the basic design
parameters and materials are determined, working designs are formulated,
generally with computer-aided design software, followed by brass models and
prototype molds. A small number of sample club heads are created and used for
testing. After field testing, any design changes are implemented and the
specifications are given to potential outside manufacturers who are selected
based on price and quality. Once the initial products are inspected and
approved, mass production may begin.
The regular introduction of new products does, however, have certain risks.
Prior designs of the Company, even if successful, may be rendered obsolete
within a relatively short period of time as new products are introduced. Basic
design changes in existing golf equipment and new models may be met with
consumer rejection. New products with lower prices can decrease revenues even
with increased unit sales. The rapid introduction of new products could result
in closeouts of existing inventories for wholesale and retail sales. Such
closeouts could reduce margins on sales of older products and reduce sales of
new products. Such events could have a material adverse impact on the Company's
operations.
The Company plans its orders to manufacturers based upon the forecasted
demand for its products. Actual demand may be more or less than forecasted
demand. Since the Company's overseas club-head vendors generally require 30-45
day lead times to produce heads after a purchase order is placed, and since
shipments from these vendors average 25-30 days, the Company's ability to
quickly expand its manufacturing capacity for new products is limited. If the
Company is unable to produce sufficient quantities of new products in time to
fulfill actual demand, it could limit the Company's sales and adversely affect
its financial performance. If actual demand is less than forecasted, the
Company could have excess inventories and related obsolescent charges that could
adversely affect financial performance.
Sales and Marketing
The Company sells its products through wholesale sales to on-course and
off-course golf retail shops and selected sporting goods retailers and through
direct sales to consumers using television infomercials, direct mail,
telemarketing and the Company's web site.
Retail Sales. A significant portion of the Company's sales are to U.S.
retailers. To generate retailer loyalty and maintain its high quality
reputation, the Company does not currently sell to price sensitive general
discount warehouses or membership chains. For the nine months ended September
30, 1999 and for the fiscal years ended December 31, 1998 and 1997, sales to
retailers accounted for approximately 71%, 46% and 57%, respectively, of total
sales.
Retail accounts are handled by a national network of independent sales
representatives supported by the Company's executive office and a telemarketing
team of 12 employees in San Diego. At September 30, 1999, the Company had 32
independent sales representatives who receive a commission on qualifying sales
and are free to sell for other golf equipment companies. Although the Company
works closely with its sales representatives, it cannot directly control or
insure the effectiveness of their sales and marketing activities.
6
<PAGE>
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 the Company believes its relationships with its customers
are satisfactory, there can be no assurance the Company will be able to maintain
such relationships in the future.
International Sales. The Company markets its products outside the United
States through independent distributors. The primary foreign market is Japan.
Sales have also been made in Korea, United Kingdom, Germany, Sweden, Puerto Rico
and the Phillippines. International sales accounted for 14.7%, 6% and 2.3% of
the Company's net sales for the nine months ended September 30, 1999, and for
the 1998 and 1997 fiscal years, respectively.
The Company's 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 $1,704,619 (12.4% of
overall net sales) for the nine months ended September 30, 1999 and
approximately $1,122,993 (9% of overall net sales) for the fiscal year 1998.
The Company's foreign operations increase the Company's exposure to
fluctuations in exchange rates for various foreign currencies which could result
in losses, and in turn, adversely impact the Company's business, financial
conditions and results of operations.
Customer Service Support. The Company believes that superior customer
service can significantly enhance its marketing efforts. The Company maintains
an in-house customer service department for both wholesale and direct consumer
trade. A 24-hour 7-day-a-week inbound telemarketing company answers customer
calls generated by the Company's infomercials. The Company's sales
representatives directly service the retail accounts.
Advertising and Promotion. The Company seeks to promote its 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. To date, the Company has avoided general image
advertising (in television or print), choosing instead to focus its marketing
budget on direct response advertising which the Company believes 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.
The Company regularly places direct response advertisements in national print
publications such as Golf Digest and Golf World and has used television
infomercials for specific products.
Infomercials. The Company has 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 to the market through
infomercials. The Company believes that good infomercials can enhance consumer
awareness of its products, make immediate sales, and expand the retail customer
base. Infomercials are typically 28 minutes long, feature celebrities, pro
athletes and/or golf professionals and are shown primarily on the Golf Channel
and major regional sports channels. During their economic life, they are often
aired every day, particularly on weekends.
Direct Response. In addition to direct response advertising, the Company
pursues 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, the Company is
able to secure cash payment before shipment without any credit risk or accounts
receivable management.
Product Endorsements. The Company promotes its products to touring golf
professionals. In August, 1999, the Company 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,
7
<PAGE>
$500,000 in Year 4, $550,000 in Year 5 and $575,000 in Year 6. The Company has
the right to terminate the arrangement if 2001 sales do not reach $25 million.
Carbite Golf Web Site. The Company's products are promoted and offered
for sale on the Company's internet web site (www.carbitegolf.com).
The Company's total advertising and marketing related expenses were
approximately $5.3 million and $3.0 million for the fiscal years 1998 and 1997,
and $4.6 million for the nine months ended September 30, 1999.
Manufacturing, Assembly and Raw Materials
The principal components for the Company's golf clubs (clubheads, shafts
and grips) are manufactured by outside suppliers and shipped to the Company for
assembly. The suppliers are selected based on the quality of the finished
products, materials, dependability and pricing. All clubheads are designed by
the Company which provides the manufacturers with detailed specifications. They
are inspected prior to shipment by a quality control inspector employed by the
Company in Taiwan.
All assembly operations, including painting, stenciling and the application
of trade dress, are completed at the Company's 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.
The Company is dependent on a limited number of suppliers and does not have
prior written agreements with them. The principal clubhead suppliers, all based
in Taiwan, are CIPA, New Abiding, Tibest International and Ever Ring. The
principal shaft suppliers are True Temper, Neo Fiber and Titan. The principal
grip suppliers are Rubberon, Eaton and Lamkin. Some of the Company's products
require specifically developed manufacturing techniques and processes which make
it difficult to identify and utilize alternative suppliers quickly. The Company
believes that suitable clubheads, shafts and grips could be obtained from
alternative manufacturers, but any significant production delay or disruption
caused by the inability of current suppliers to deliver or the transition to
other suppliers could have a material adverse effect on the Company's business,
results of operations and financial position.
Dependence on Major Customers
During the fiscal years ended December 31, 1998 and 1997, no customer
accounted for more than 10% of net sales revenue. For the nine months ended
September 30, 1999, one foreign distributor accounted for approximately 12.4% of
net sales.
Patents and Trademarks
The Company is the exclusive assignee, subject to a royalty obligation, of
the following seven U.S. registered patents owned by Chester S. Shira which give
the Company the exclusive right to produce golf clubs incorporating the
proprietary powder metallurgy processes set forth in these patents: No.
4,768,787 (issued 9/6/88); No. 4,992,236 (issued 2/12/91); No. 5,062,638 (issued
11/5/91); No. 5,094,810 (issued 3/10/92); No. 5,217,227 (issued 6/8/93); No.
5,669,825 (issued 9/23/97); and No. 5,755,626 (issued 5/26/98). Eight
additional patent applications are pending, but have not been issued.
The Company's ability to compete effectively in the golf club market will
depend, in part, on its ability to maintain the proprietary nature of its
technologies and products covered by these patents. There can be no assurance,
however, as to the degree of protection afforded by these patents or as to the
likelihood that patents will be issued from
8
<PAGE>
the pending patent applications. Moreover, these patents may have limited
commercial value or may lack sufficient breadth to adequately protect the
aspects of the Company's products to which the patents relate.
There can be no assurance that competitors, many of which have
substantially greater resources than the Company and have made substantial
investments in competing products, will not apply for and obtain patents of
their own that will prevent, limit or interfere with the Company's ability to
make and sell its products. The Company is aware of numerous patents held by
third parties that relate to products competitive to the Company's. There is no
assurance that these patents would not be used as a basis to challenge the
validity or limit the scope the Company's patent rights. A successful challenge
to the validity of the Company's patents may adversely affect the Company's
competitive position. Moreover, there can be no assurance that such patent
holders or other third parties will not claim infringement by the Company 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 the
Company's products or technologies. The defense and prosecution of patent suits
is costly and time-consuming, even if the ultimate outcome is favorable. This
is particularly true in foreign countries where expenses associated with such
proceedings can be prohibitive. An adverse outcome in the defense of a patent
suit could subject the Company to significant liabilities to third parties,
require the Company 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. The Company also relies on unpatented proprietary technology.
Third parties could develop the same or similar technology or otherwise obtain
access to the Company's proprietary technology.
The Company's products are principally sold under the Carbite brand name.
The Company is the owner of the following U.S. trademarks registered with the
U.S. Patent office: "Carbite;" "Check Mate;" "Multi Density;" "Dual Density;"
and "Diatanium." The "Carbite" mark is also registered in Japan and Germany.
The Company has applied for U.S. registration of the following marks and
such applications are pending: "Ti-Gear;" "Di-Gear;" "Nomis;" "Yipless;" "Multi
Density;" "Dual Density;" "Polar Balanced;" "Dovetail Design;" "Enerlite;" and
"Mometal." There can be no assurance that any such pending trademarks will be
granted.
In 1997, Orlimar Golf Company advised the Company that it believed that the
Gyroseven wood infringed Orlimar's rights in the trademark "Gyro" which Orlimar
had previously used on a putter product. To resolve this matter, the Company
agreed to cease production of additional Gyrosevens and paid a royalty to
Orlimar totaling $25,000. The Company no longer uses the Gyroseven name.
The Company has developed procedures to maintain the secrecy of its
confidential business information. These procedures include criteria for access
to and distribution of information and require written confidentiality
agreements with certain employees and vendors. There can be no assurance these
measures will prove adequate in all instances to protect the Company's
confidential information.
Licenses
In January, 1995, the Company licensed to Taylor Made Golf Company the
rights to use its bronze high friction inserts under the Taylor Made brand name
on irons. In March, 1997, that agreement was extended through December 31,
1999. Taylor Made may purchase the inserts directly from the supplier, subject
to certain exceptions. For the fiscal years ended December 31, 1998 and 1997,
and for the nine months ended September 30, 1999, the Company received royalty
fees of $60,101, $202,778 and $5,000 from Taylor Made.
In October 28, 1998, the Company 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. The License
Agreement may be terminated by either party in the event of a material breach.
For the fiscal year ended December 31, 1998 and for the nine months
9
<PAGE>
ended September 30, 1999, the Company was paid $221,308 and $161,571,
respectively, in royalties pursuant to this License Agreement.
Daiwa Agreements
In September, 1999, the Company entered into two agreements with Daiwa
Seiko of Japan:
A Trademark License Agreement which permits the Company 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. 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).
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 buy 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.
Competition
The Company operates in a highly-competitive market which is served by a
number of well-established and well-financed companies with recognized brand
names, as well as new companies with popular products. The Company believes it
competes in the mid-priced to premium-priced segment of the golf club industry.
The majority of the Company's competitors have substantially greater capital
resources, depth of management and brand name identification in the golf
industry than the Company. The Company believes it competes primarily on the
basis of performance, quality, price and brand name recognition. The Company's
competitors include Callaway, Taylor Made, Ping, Titleist, Odyssey and
Cleveland.
The golf club industry is generally characterized by rapid and widespread
imitation of popular technologies, designs and product concepts developed by
both new and/or existing competitors. Occasionally, new market entrants may
develop innovative club designs which meet with acceptance from golf club
purchasers, leading to unanticipated changes in consumer preferences. Many
purchasers of golf clubs desire golf clubs that feature the latest technological
innovations and cosmetic designs, and their purchasing decisions are often the
result of highly subjective preferences which can be influenced by many factors,
including, advertising, media and product endorsements. The Company could,
therefore, face substantial competition from existing or new competitors who
successfully introduce new clubs perceived to offer performance advantages and
greater aesthetic appeal. Golf club manufacturers which do not currently compete
directly with the Company could pose significant competition in the future if
they were to enter the market of medium to premium-priced high-quality clubs.
There can be no assurance the Company will compete successfully in the future.
Seasonality
Golf generally is regarded as a warm weather sport and sales of golf
equipment historically have been strongest during the second and third quarters,
with the weakest sales occurring during the fourth quarter. As a result, the
Company's operating results are highly seasonal. Sales of golf clubs are also
dependent on discretionary consumer spending, which 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 the Company's business, operating results and financial condition. The
Company's future results of operations could also be affected by a
10
<PAGE>
number of other factors, such as the unseasonal "El Nino" weather patterns
experienced during the winter of 1997-1998; new product introductions by the
Company's competitors; competitive pressures resulting in lower than expected
average selling prices; and a reduction in sales volume.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall. Technological advances by
competitors or other competitive factors may require the Company to invest
significantly greater resources than anticipated in research and development or
sales and marketing efforts. Accordingly, the Company believes that period-to-
period comparisons of its results of operations should not be relied upon as an
indication of future performance. Likewise, the results of any quarter are not
indicative of results to be expected for a full fiscal year.
Product Warranty
The Company supports all of its golf clubs with a limited two year written
warranty to the original purchaser. To date, the Company has experienced only
nominal warranty claims which are generally resolved with a replacement product.
The Company monitors the level and nature of any products breakage and, where
appropriate, seeks to incorporate design and product changes to assure its
customers of the highest quality products. If Carbite clubs were to experience
a significant increase in the incidence of breakage or other product problems,
the Company's sales and image with golfers could be materially adversely
affected.
Regulatory Matters
The design of new golf clubs is subject to various regulations by the
United States Golf Association ("USGA") relating to materials, construction,
size and weight of golf clubs. Although the equipment standards established by
the USGA generally apply only to competitive events sanctioned by that
organization, the Company believes it is critical for its success that its clubs
comply with USGA standards. The Company's current products all comply with USGA
standards.
The process of securing a favorable ruling from the USGA on a given product is
subjective and 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 could
adversely affect the sales of the Company's products in the future. If any of
the Company's clubs were found to be non-conforming to USGA standards, it could
have a materially adverse effect on the Company's sales, image and overall
financial performance.
The Company's facilities are subject to numerous federal, state and local
laws and regulations designed to protect the environment from waste and
emissions and hazardous substances. The Company is also subject to the federal
Occupational Safety and Health Act and other laws and regulations affecting the
safety and health of employees in the production areas of its facilities. The
Company believes it is in compliance in all material respects with all
applicable environmental and occupational safety regulations.
Employees
As of September 30, 1999, the Company had 83 full-time employees, including
36 in product assembly and shipping, 29 in sales and marketing, and 18 in
management, finance and administration. None of the Company's employees are
represented by a union, and the Company has not experienced any work stoppages.
The Company considers its relations with its employees to be satisfactory.
11
<PAGE>
Acquisitions
The Company regularly reviews possible acquisition opportunities to
potentially expand its business. The Company may make acquisitions of, or
strategic alliances with, complementary services, technologies, product designs
or businesses in the future, but only if such are available on advantageous
terms and can substantially aid the Company in expanding its market share and
product line. There can be no assurance, however, that any future acquisition
or other arrangement will be completed or that, if completed, any such
acquisition will be effectively assimilated into the Company's business.
Acquisitions involve numerous risks, including 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 the Company's
ongoing business, the maintenance of uniform standards, controls, procedures and
policies, and the impairment of the Company's reputation and relationships with
employees and customers. Any future acquisitions could also 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 the Company's
business, operating results or financial condition.
Enforceability of Certain Civil Liabilities
The Company is a Canadian corporation. One of its five directors and its
accountants referenced herein reside outside of the United States.
Substantially all of the assets of these persons are located outside of the
United States. However, the sole asset of the Company, Carbite, Inc. and all of
the Carbite, Inc.'s assets are located in the United States. It may not be
possible for investors to effect services of process within the United States
upon the director and the accountants who reside outside of the United States,
or to enforce against the Company or such persons judgments obtained in a United
States court predicated upon the liability provisions of the United States
securities laws. The Company believes there is doubt as to the enforceability
in British Columbia, Canada, where the Company's principal executive offices are
located, of judgments against the Company or its directors or accountants named
herein who are not residents of the United States, predicated solely on the
civil liability provisions of these laws.
Additional Information
The Company furnishes its shareholders with an annual report containing
audited financial statements prepared in accordance with generally accepted
accounting principles in Canada ("Canadian G.A.A.P.") that have been reported on
by its independent chartered accountants that will include, if applicable, a
reconciliation between the presentation made in accordance with Canadian
G.A.A.P. and one made in accordance with generally accepted accounting
principles in the United States ("G.A.A.P."). The Company also furnishes its
shareholders with quarterly reports for the first three quarters of each fiscal
year containing unaudited summary financial information.
Upon completion of this registration, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and, in accordance therewith, will file reports, proxy statements and
other information with the Securities and Exchange Commission ("Commission").
Such reports, proxy statements and other information may be inspected at public
reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street
N.W., Washington, DC 20549; Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; 7 World Trade Center, New York, New York
10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of
such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, DC 20549 at
prescribed rates.
12
<PAGE>
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 the performance of the Company for the Nine
Months Ended September 30, 1999 and 1998, and the fiscal years ended December
31, 1998 and 1997, and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Registration Statement.
Overview
The Company was originally incorporated in British Columbia, Canada in 1985
as Q Data Systems, Inc. and its stock has been publicly traded on the Vancouver
Stock Exchange since 1986. The Company's original business was the development
and sale of an electronic stock quotation device. In 1992, the Company changed
its name to Consolidated Q Data Systems, Inc. and expanded its business with the
acquisition of an automobile dealership. Both of those businesses were
discontinued in 1996.
In June 1994, the Company invested $1.4 million through a series of
transactions to acquire 50% of the outstanding equity in Carbite, Inc. and
secured an option to purchase the remaining 50%. In January 1996, the Company
changed its name to Carbite Golf, Inc.
In a transaction that closed September 3, 1997, the Company completed its
acquisition of Carbite, Inc. through a share exchange of 6.78 million shares of
the Company's common stock at a price of $.90 Canadian for all the outstanding
shares of Carbite, Inc. Simultaneously, the Company completed its acquisition
of Advanced Golf Systems, Inc. through a share exchange of 700,000 shares of the
Company's common stock at a price of $.90 Canadian for all the outstanding
shares of Advanced Golf Systems, Inc. and warrants to purchase an additional
700,000 shares, all of which expired unexercised in September, 1999. The merger
of the Company with Carbite, Inc. and Advanced Golf Systems, Inc. was approved
by the Vancouver Stock Exchange and the California Department of Corporations in
September 1997, and in connection with the merger, the Company obtained a
fairness opinion from KPMG LLP.
In August 1997, the Company acquired the assets of Printer Graphics, a
printing business based in Vancouver, Canada which printing business was
subsequently discontinued in September 1998.
The Company's financial results are derived primarily from the operating
results of its wholly-owned subsidiary, Carbite, Inc., whose operating results
are included in the consolidated financial statements only from September 3,
1997 forward, the date the Company completed its merger with Carbite, Inc. The
other wholly-owned subsidiary of the Company, Advanced Golf Systems, a
California corporation, has no on-going operations and the Company intends to
dissolve it in 1999.
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 sales increased to $10.6 million for 1996 from $2.9 million for 1995,
decreased to $8.7 million in 1997 and then increased to $15.6 million in 1998.
For the nine months ended September 30, 1999 sales increased to $14.1 million
from $12.2 million for the nine months ended September 30, 1998. 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 currently 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.
The Company's cost of goods sold includes labor and occupancy costs in
connection with the inspection, testing and assembly of component parts at its
facility in San Diego, California. Operating expenses are composed primarily of
selling and royalty expenses, general and administrative expenses, research and
development expenses. Selling and
13
<PAGE>
royalty expenses include advertising and marketing expenses, salaries and
commissions, and royalties and consulting fees paid to talent and the producer
of the Company's infomercials. During the fiscal years ended December 31, 1997,
December 31, 1998 and for the nine months ended September 30, 1999, royalties
were approximately 1% of net sales.
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
The following table sets forth the Company's operating results expressed as
a percentage of net sales for the Nine Months Ending September 30, 1999 compared
with the Nine Months Ending September 30, 1998. The Company believes this is
the first nine-month period to period comparison of consolidated results that is
generally indicative of the relative financial components of the Company's
operations since Carbite, Inc. results were included in the Company's
consolidated financial statements only as of September 3, 1997.
Statement of Operations
<TABLE>
<CAPTION>
Nine Months Ending September 30,
1999 1998
---------------------------------------------
<S> <C> <C> <C> <C>
(US Dollars)
Net Sales $14,062,812 100.00% $12,168,503 100.00%
Cost of goods sold 7,142,713 50.79% 5,017,305 41.23%
Gross profit 6,920,099 49.21% 7,151,198 58.77%
Selling expenses 4,405,246 31.33% 5,059,820 41.58%
Operating expenses 1,325,623 9.42% 920,285 7.56%
Net operating income 1,189,230 8.46% 1,171,093 9.62%
Research and development (341,703) -2.43% (241,744) -1.99%
Other expenses (7,866) -0.06% (39,372) -0.32%
Amortization of goodwill and deferred costs (304,883) -2.17% (304,868) -2.51%
Gain on discontinued printing operation 68,138 0.48% -- 0.00%
Loss on disposal of fixed assets -- 0.00% (31,670) -0.26%
Income (loss) before income taxes 602,916 4.29% 553,439 4.54%
Income taxes (397,722) -2.83% -- 0.00%
Net income (loss) 205,194 1.46% 553,439 4.54%
</TABLE>
Net sales increased to $14.1 million for the Nine Months Ended September
30, 1999 from $12.2 million for the comparable period of 1998, primarily due to
strong wholesale sales of the Polar Balanced Putters. Sales of the Polar
Balanced Putter began with an infomercial marketing campaign in March 1998 and
for the nine months ended September 30, 1999, direct consumer sales of the
putters were $443,000 and wholesale sales to distributors were $3,048,000. In
the first quarter of 1998, the Company was still running the infomercial
campaign for the Gyroseven Wood, which produced $375,000 in direct consumer
sales and $107,000 in wholesale sales. The Gyroseven infomercial was not used
in 1999.
14
<PAGE>
Cost of goods sold increased to $7,142,713 for the nine months ended
September 30, 1999 compared to $5,017,305 for the comparable period in 1998.
The increase is the result of the increase in sales and a change in the mix of
sales described below. Gross profit decreased to $6,920,099 for the nine months
ending September 30, 1999, from $7,151,198 for the comparable period in 1998.
The gross profit percentages were 49.2% and 58.8% respectively. The reason for
the decrease in gross profit percentage is due to the sales mix changing to a
greater percentage of wholesale sales versus direct consumer sales in 1999.
Wholesale sales have a gross profit ranging from 40-55% compared to 250-400% for
direct consumer sales.
Operating income increased to $1,189,230 for the nine months ended
September 30, 1999 from $1,171,093 for the comparable period in 1998. Total
operating expenses including selling expenses decreased to $5.7 million for the
nine months ended September 30, 1999 from $6 million for the comparable period
in 1998 which represented 40.8% and 49.1% of net sales respectively. The
decrease in operating expenses as a percentage of sales in the first nine months
of 1999 versus 1998 is due to selling expenses being cut to $4.4 million from
$5.9 million. The effectiveness of the Polar Balanced Putter infomercial
decreased in 1999, so the media spent on buying television time decreased. The
operating results include a reserve of $120,000 against a potentially
uncollectible receivable of approximately $372,000 from a customer; the entire
amount may be uncollectible. Net income after taxes for the nine months ended
September 30, 1999 decreased to $205,194 from $553,439 for the comparable period
in 1998. The decrease is primarily due to $397,722 provision for income taxes
in 1999. In 1998, the company benefitted from net operating loss carryforwards,
which offset all of the federal and state taxes that would have been due.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following table sets forth the operating results expressed as a
percentage of net sales for the periods indicated for Carbite Golf, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
----------------------------- ----------------------
<S> <C> <C> <C> <C>
Net Sales $15,790,853 100.0% $ 2,345,014 100.0%
Cost of goods sold 7,157,329 45.3% 1,287,030 54.9%
Gross profit 8,633,524 54.7% 1,057,984 45.1%
Operating expenses 1,154,649 7.3% 578,616 24.7%
Net operating income 1,296,438 8.2% (774,406) -33.0%
Research and development (345,900) -2.2% (95,536) -4.1%
Other expenses (69,406) -0.4% (210,365) -9.0%
Amortization of goodwill and def costs (531,860) -3.4% (262,726) -11.2%
Gain on discontinued printing operation --- 0.0% --- 0.0%
Loss on disposal of fixed assets (57,954) -0.4% --- 0.0%
Income (loss) before income taxes 291,318 1.8% (1,343,033) -57.3%
Income taxes (52,800) -0.3% (8,423) -0.4%
Net income (loss) 238,518 1.5% (1,351,456) -57.6%
</TABLE>
Net consolidated sales for Carbite Golf Inc. for the fiscal year ended 1998 were
$15.7 million compared to $2.3 million for fiscal 1997. The increase was the
result of only the operations of Carbite, Inc. from September 3, 1997 through
15
<PAGE>
December 31, 1997 being included in the consolidated financial statements for
1997. Thus, the comparison is of the fourth quarter of 1997 to a full year of
operations for 1998.
Cost of goods sold was $7,157,329 for the fiscal year ended December 31,
1998 compared to $1,287,030 for fiscal 1997. The increase is the result of only
the operations of Carbite, Inc. from September 3, 1997 through December 31, 1997
being included in the consolidated financial statements for 1997. Thus, the
comparison is of the fourth quarter of 1997 to a full year of operations for
1998. Gross profit was $8.6 million for the fiscal year ended 1998 compared to
1.0 million for fiscal 1997. Operating expenses increased to $1,154,649 for the
fiscal year ended December 31, 1998 compared to $578,616 for fiscal 1997. The
increase was the result of only the operations of Carbite, Inc. from September
3, 1997 through December 31, 1997 being included in the consolidated financial
statements for 1997. Thus, the comparison is of the fourth quarter of 1997 to a
full year of operations for 1998. Net income was $238,518 in the fiscal year
ended 1998 compared to a loss of $1.35 million in fiscal 1997. The loss in 1997
was caused by (i) the fact that the consolidated statements for 1997 included
only the post-merger fourth quarter for Carbite, Inc. (generally the weakest
sales quarter in the golf industry); (ii) merger costs; (iii) amortization of
goodwill; (iv) year-end write offs and inventory adjustments.
Consolidated Q Data did not have any operating companies in 1996 and thus
no revenues. It incurred $229,000 in losses related to raising capital and
maintaining its good status as a listed corporation on the Vancouver Stock
Exchange. Under other income, it reported a minority interest income from
Carbite, Inc. of $73,000. The net loss including amortization of previously
deferred costs was $238,000.
The Company believes this comparison of the Company's consolidated
financials from 1997 to 1998 does not fully describe overall operating results
because the 1997 consolidated statement only included the final quarter for
Carbite, Inc., the golf operating company. Net sales for Carbite, Inc. increased
to $15.64 million for fiscal 1998 from $8.8 million in fiscal 1997, due
primarily to the Polar Balanced Putter infomercial which produced $7.1 million
in direct consumer sales and $5.2 million in retail sales in fiscal 1998. Gross
profit for Carbite, Inc. increased to $8.9 million (56.7%) in 1998 from $4.3
million (49.1%) in 1997. Operating expenses increased to $1,002,092 in 1998 from
$789,700 in 1997, but decreased as a percent of sales to 6.3% from 9.0%. Net
operating income increased to $1,502,089 from a $595,949 loss in 1997. Net
income after taxes increased to $879,833 in 1998 from a loss of $881,875 in
1997.
Quarterly Results and Seasonality
Golf generally is regarded as a warm weather sport and sales of golf
equipment historically have been strongest during the second and third quarters,
with the weakest sales occurring during the fourth quarter. The results of any
one quarter, therefore, are not necessarily indicative of annual results or
continuing trends. In addition, sales of golf clubs are dependent on
discretionary consumer spending, which 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 the
Company's business, operating results and financial condition. In addition, the
Company's future results of operations could be affected by a number of other
factors such as unseasonal weather patterns, new product introductions by the
Company's 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 the
Company failing to achieve its expectations as to future sales or net income.
Because most operating expenses are relatively fixed in the short term, the
Company 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 the Company to invest significantly greater
resources than anticipated in research and development or sales and marketing
efforts, the company's business, operating results or financial condition could
be materially adversely affected. Accordingly, the Company believes that period-
to-period comparisons of its results of operations should not
16
<PAGE>
be relied upon as an indication of future performance. In addition, 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 the Company's results of operations
may be below the expectations of public market analysts or investors. In such
event, the market price of the Company's Common Stock would be materially
adversely affected.
Computer Systems and Year 2000 Compliance
As of May 1, 1999, the Company initiated a system-wide upgrade of all
computer systems which are intended to provide the Company with state-of-the-art
systems and hardware for financial, manufacturing, customer services and
telemarketing functions. The system is designed to be fully "Year 2000"
compliant. The system was fully operational by December 1, 1999. Total costs
associated with the new system, including Year 2000 compliance, were
approximately $100,000.
The Company believes that its manufacturing operations could be adversely
affected by external supplier systems that are not Year 2000 compliant, and
believes its overseas suppliers involve Year 2000 risk factors.
There can be no assurance that the Company's efforts to achieve Year 2000
compliance will be successful or that third parties with whom the Company has
material relationships will be Year 2000 compliant by January 1, 2000, which
could have a material adverse impact on the business and operations of the
Company.
Liquidity and Capital Resources
The Company has historically financed its 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, 1998 compared to net cash used in 1997 and 1996 of $663,000 and
$158,000, respectively.
In April, 1998, the Company 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.
The Company has two commercial credit facilities, both with Scripps Bank in
San Diego, California, including a $1,000,000 Revolving Credit Facility, which
expires on May 15, 2000 and a $60,000 term equipment loan due November 15, 2002.
As of September 30, 1999, the Company had drawn $193,000 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
and are collateralized by substantially all of the Company's assets,
receivables, inventory and equipment.
The Company's capital expenditures amounted to $354,115, $256,000 and
$35,000 for the nine months ended September 30, 1999 and the fiscal years ended
December 31, 1998 and 1997, respectively.
17
<PAGE>
The Company believes that cash flow from operations, and the Company's
$1,000,000 credit facility will be sufficient to meet operating needs and
capital expenditures to maintain sales at the current levels.
To finance growth and new product introduction planned for the fiscal year
2000, the Company believes it will require approximately $1,000,000 in equity or
debt private placement financing, for which there are presently no firm
commitments as of December 15, 1999 and there can be no assurance that any such
financing will be secured.
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 the nine months ended September 30, 1999 and the fiscal years ended
December 31, 1998 and 1997, approximately 81.9%, 66% and 0%, respectively, of
the Company's net sales were derived from the sale of Polar Balanced Putter.
Sales of this product line are expected to account for a substantial portion of
the Company's net sales for some time. A decline in demand for, or average
selling prices of, the Polar Balanced Putter line of products would have a
material adverse effect on the Company's business, operating results and
financial condition. Accordingly, the Company's continued growth and success
depend, in large part, on its ability to successfully develop and introduce new
products accepted in the marketplace. Historically, a large portion of new golf
club technologies and product designs have been met with consumer rejection. No
assurance can be given that the new products currently under development will
meet with market acceptance or that the Company will be able to continue to
design, manufacture and introduce new products that will meet with market
acceptance. Failure by the Company to identify and develop innovative new
products that achieve widespread market acceptance would adversely affect the
Company's future growth and profitability. Additionally, successful
technologies, designs and product concepts are likely to be copied by
competitors. Accordingly, the Company's operating results could fluctuate as a
result of the amount, timing and market acceptance of new product introductions
by the Company or its competitors. The design of new golf clubs is also 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, the
Company believes that it is critical for its future success that new clubs
introduced by the Company 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 the Company's
products.
Patents and Protection of Proprietary Technology
The Company's ability to compete effectively in the golf club market will
depend, in large part, on its ability to maintain the proprietary nature of its
technologies and products. The Company is currently the assignee, subject to the
obligation to pay a royalty, of seven U.S. patents relating to certain of its
products and proprietary technologies. There can be no assurance, however, as to
the degree of protection afforded by these patents. Moreover, these patents may
have limited commercial value or may lack sufficient breadth to adequately
protect the aspects of the Company's products to which the patents relate. The
Company's U.S. patent rights do not preclude competitors from developing or
marketing products similar to the Company's products in international markets.
There can be no assurance that competitors, many of which have
substantially greater resources than the Company and have made substantial
investments in competing products, will not apply for and obtain patents that
will prevent, limit or interfere with the Company's ability to make and sell its
products. The Company is aware of numerous patents held by third parties that
relate to products competitive to the Company's. There is no assurance that
these patents would not be used as a basis to challenge the validity of one or
more of the Company's patent rights, to limit the scope of the Company's patent
rights or to limit the Company's ability to obtain additional or broader patent
rights.
18
<PAGE>
A successful challenge to the validity of the Company's patent rights may
adversely affect the Company's competitive position. Moreover, there can be no
assurance that such patent holders or other third parties will not claim
infringement by the Company 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 the Company's 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 the Company to significant liabilities to
third parties, require the Company 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. The Company also relies on unpatented proprietary
technology. Third parties could develop the same or similar technology or
otherwise obtain access to the Company's proprietary technology. See "Business--
Patents and Trademarks."
Highly Competitive Industry; Significant Price Competition
The market for golf clubs is highly competitive. The Company's competitors
include a number of established companies, most of which have greater financial
and other resources than the Company. The purchasing decisions of many golfers
are often the result of highly subjective preferences, which can be influenced
by many factors, including, among others, advertising, media, promotions and
product endorsements. The Company could therefore face substantial competition
from existing or new competitors that introduce and successfully promote golf
clubs that achieve market acceptance. Further, there can be no assurance that
the Company's marketing strategy will not be emulated by others, thereby
diluting the Company's message or forcing the Company 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 Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future sources of competition or that its
business, operating results or financial condition will not be adversely
affected by increased competition in the markets in which it operates. See
"Business--Competition."
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,
with the weakest sales occurring during the fourth quarter. In addition, sales
of golf clubs are dependent on discretionary consumer spending, which 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 the Company's business, operating results and
financial condition. In addition, the Company's future results of operations
could be affected by a number of other factors, such as unseasonal weather
patterns; demand for and market acceptance of the Company's existing and future
products; new product introductions by the Company's 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 the Company failing to achieve its
expectations as to future sales or net income. Because most operating expenses
are relatively fixed in the short term, the Company 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 the Company to invest significantly greater resources than
anticipated in research and development or sales and marketing efforts, the
Company's business, operating results or financial condition could be materially
adversely affected. Accordingly, the Company believes that period- to-period
comparisons of its results of operations should not be relied upon as an
indication of future performance. In addition, 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 the Company's results of operations may be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's Common Stock would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
19
<PAGE>
Future Capital Needs; Need for Additional Financing
The Company estimates that it may need significant funding, in addition to
its present capital, to be able to fully develop and expand its business. The
Company's future capital requirements will depend upon many factors, including
the extent and timing of acceptance of the Company's products in the market,
commitments to third parties to develop and manufacture products, the progress
of the Company's product development efforts, the Company's operating results
and the status of competitive products. Between January 1, 1999 and September
30, 1999 the Company raised approximately $942,000 in additional capital. While
the Company is currently attempting to raise additional funding, the Company has
no commitment for such additional funding. There is no assurance that the
Company will be able to obtain such funding; if obtained, such funding could
dilute the ownership of present shareholders.
Dependence on Golf Industry
The financial performance of the Company 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. The
Company believes that the golf equipment industry will continue to be subject to
this period of oversupply through the end of 1999. The golf equipment industry
has experienced significant growth but demonstrated a slowdown in demand in 1998
and early 1999. 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. Accordingly, any factor adversely affecting the golf equipment
industry may materially adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the
Company's net sales and results of operations will not be materially adversely
affected if downturns or slowdowns in the golf equipment industry continue or
occur again in the future.
Ability to Manage Growth
The Company has recently experienced a period of rapid growth that has
resulted in new and increased responsibilities for existing management
personnel. The Company's growth has placed, and is expected to continue to
place, a strain on the Company's systems and resources to accommodate this
recent growth. To compete effectively and manage future growth, if any, the
Company will be required to continue to implement and improve its operational,
financial and management information systems, procedures and controls on a
timely basis and to expend, train, motivate and manage its workforce. There can
be no assurance the Company's personnel, systems, procedures and controls will
be adequate to support its existing or future operations. Any failure to
implement and improve the Company's financial and management systems or to
expand, train, motivate or manage employees could have a material adverse effect
on the Company's business, operating results or financial condition.
Dependence on Key Personnel
The Company's success depends to a significant extent upon the performance
of its senior management team, particularly the Company's founder, Chester S.
Shira, and its President, Michael A. Spacciapolli. Mr. Shira leads the Company's
products development efforts. Mr. Spacciapolli directs day to day affairs of the
Company. The loss or unavailability of Mr. Shira or Mr. Spacciapolli would
adversely affect the Company's business and prospects. The Company does not
maintain life insurance on either Mr. Shira or Mr. Spacciapolli. Mr. Shira and
Mr. Spacciapolli are bound by employment agreements with the Company, but they
expire on September 3, 2000. In addition, 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 the
Company's business, operating results or financial condition.
20
<PAGE>
Risks Associated with Acquisitions
The Company regularly reviews possible acquisition opportunities and may
make future acquisitions of complementary services, technologies, product
designs or businesses in the future. The Company has 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 the Company's 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 the Company's ongoing business, the maintenance of uniform standards,
controls, procedures and policies, and the impairment of the Company's
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 the Company's business, operating results or
financial condition.
Effect of Outstanding Options and Warrants
As of September 30, 1999, there are outstanding options to purchase an
aggregate of 2,864,240 shares of Common Stock and outstanding warrants to
purchase an aggregate of 791,250 shares of Common Stock. As of September 30,
1999, the Company had 22,426,486 shares of Common Stock outstanding. The
exercise of such outstanding options and warrants would dilute the percentage
ownership of the Company's 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 the Company would be
able to obtain additional equity capital could be adversely affected by the
existence of such options or warrants.
Credit Risk
The Company primarily sells its products to golf equipment retailers and
distributors, and directly to customers via infomercials. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral from these customers. The 1998-1999 downturn in the
retail golf equipment market has resulted in delinquent or uncollectible
accounts for some of the Company's customers. Management does not foresee any
significant improvement in the golf equipment market during 1999, and therefore
expects this trend to continue. Accordingly, there can be no assurance that the
Company's results of operations or cash flows will not be adversely impacted by
the failure of its customers to meet their obligations to the Company.
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 the Company's
products less marketable. The ability of the Company to compete successfully
will depend to a large degree on its ability to innovate and respond to changes
and advances in its industry. There can be no assurance that the Company will be
able over the long term to keep pace with the demands of the market place.
Risks of Technical Problems or Product Defects
There is no assurance, despite testing and quality assurance efforts that
may be performed by the Company and/or its industry partners, 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 the
Company's 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 the Company will not experience difficulties that could delay or
prevent the development and introduction of its products and services, that new
or enhanced products and services will meet with market acceptance,
21
<PAGE>
or that advancements by competitors will not erode the Company's position or
render the Company's products and services obsolete.
Dependence on Limited Number of Component Suppliers
The Company assembles all of its clubs at its San Diego facility. The
Company does not manufacture the components required to assemble its golf clubs.
The Company relies on three suppliers for heads and three suppliers each for
shafts and grips. The Company does not have written supply agreements with any
of its current suppliers. Therefore, the Company's success will be dependent on
maintaining its relationships with existing suppliers and developing
relationships with new suppliers. The Company believes that there are readily
available alternative sources for each of the components used in the manufacture
and assembly of its clubs, although, of this, there can be no assurance. Any
significant delay or disruption in the supply of components from the Company's
suppliers or any diminution of quality resulting from such supplier's
insufficient controls or inadequate component testing, would have a material
adverse effect on the Company's business, operating results and financial
condition. Further, given the highly seasonal nature of the golf equipment
industry, such adverse effect would be exacerbated should any supply delay or
quality problem occur immediately 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). See "Management's Discussion and Analysis of
Financial Condition and Plan of Operations."
Reliance on Independent Domestic Sales Representatives
Sales of the Company's products are dependent, in part, on its nationwide
network of independent sales representatives. While the Company believes that
its relationships with its sales representatives and customers are satisfactory,
there can be no assurance that the Company will be able to maintain such
relationships in the future. The Company's sales representatives are not
exclusive and may also provide services for other golf club equipment
manufacturers that offer product lines competitive with those of the Company.
Although the Company works closely with its sales representatives, the Company
cannot directly control such representatives' sales and marketing activities.
There can be no assurance that these representatives will effectively manage the
sale of the Company's products or that their selling efforts will prove
effective. See "Business--Sales and Marketing."
International Sales; Reliance on Limited Number of Foreign Distributors
During the nine months ended September 30, 1999 and the fiscal years ended
December 31, 1998 and 1997, sales to international customers, primarily through
one customer which markets products in Japan, accounted for approximately 12.4%,
6.0% and 2.3% of the Company's net sales, respectively. Accordingly, if this
distributor ceases to purchase golf clubs from the Company, the Company's sales
will be reduced significantly. The Company relies exclusively on this and other
foreign distributors to market and sell the Company's products outside the
United States. Although the Company works closely with its foreign distributors,
the Company cannot directly control such distributors' sales and marketing
activities and, accordingly, cannot manage the Company's product sales in
foreign markets. The Company's 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 those of the
Company. There can be no assurance that these distributors will effectively
manage the sale of the Company's products worldwide or that their marketing
efforts will prove effective. Additionally, the Company's international sales
may be disrupted or adversely affected by events beyond the Company's control,
including currency fluctuations and political or regulatory changes. See
"Business--Sales and Marketing."
22
<PAGE>
DESCRIPTION OF PROPERTY
The Company's principal executive offices presently are located at 6330
Nancy Ridge Drive, San Diego, California, where it leases approximately 17,000
square feet of office, warehouse, manufacturing and research and development
space. That lease carries a base rent of $12,400 per month and runs through
January 30, 2000. The Company has completed plans to move its headquarters upon
expiration of the current lease on January 30, 2000 and has entered into a four-
year lease commencing February 1, 2000 for a 26,000 square foot facility in the
same area which the Company believes will accommodate the Company's expected
growth. Base rent under the new lease will be $20,185 per month with 4% annual
increases.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1999 by:
(i) each person who is known by the Company 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.
<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)/.......................................... 4,718,130 21.04%
Michael A. Spacciapolli/(4)/................................... 1,867,694 6.89%
Randie Burrell/(5)/............................................ 224,400 1.00%
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).... 8,077,366 36.02%
</TABLE>
_______________
(1) Unless otherwise indicated, the address of each person is in care of the
Company at 6330 Nancy Ridge Drive, Suite 107, 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 September 30, 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 in 22,426,486 shares outstanding as of
September 30, 1999.
(3) Includes 389,620 shares which Mr. Shira has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of September 30, 1999.
(4) Includes 1,444,120 shares which Mr. Spacciapolli has the right to acquire
upon exercise of outstanding options and all of such options were
exercisable as of September 30, 1999.
(5) Includes 67,500 shares which Mr. Burrell has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of September 30, 1999.
23
<PAGE>
(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 September 30, 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 September 30, 1999.
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company are 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 the Company's wholly-owned subsidiary,
Carbite, Inc., and has been its Chairman of the Board since 1988. From 1988 to
1994 he also served as President and Chief Executive Officer of Carbite, Inc.
Mr. Shira has been Chairman of the Board and Director of Research and
Development of the Company 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
of the Company 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.
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.
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, 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.
24
<PAGE>
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.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid by the Company for the
fiscal years ended December 31, 1998, 1997 and 1996 to the Chief Executive
Officer and the other executive officers (collectively the "Named Executive
Officers") whose total annual salary and bonus exceed $100,000 in the fiscal
year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation(2) Awards
---------------------- --------------
Securities
Other Annual Underlying All other
Salary Bonus Compensation Options/SAR's Compensation
Name and Principal Position Year ($) ($) ($)(3) ($) ($)(1)
- --------------------------- ---- ------- ------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Chester S. Shira, Director of 1998 128,817 30,000 168,445 75,000
Research and Development 1997 128,817 124,181 164,620
1996 69,692
Michael A. Spacciapolli, Chief 1998 140,719 60,000 125,000
Executive Officer and President 1997 140,719 164,620
1996 69,692
Randie Burrell, Chief Financial 1998 96,000 47,500
Officer(1) 1997 20,000
1996
</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 $50,000 or 10% of the Name Executive
Officers total annual salary and bonus.
(3) Represents royalties paid to Mr. Shira pursuant to the Royalty Agreement
dated March 1, 1993 between the Company and Mr. Shira.
25
<PAGE>
Option Grants
The following table sets forth information concerning stock option grants
made to the Company's Chief Executive Officer and each of the other Named
Executive Officers for the fiscal year ended December 1998:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------------
Number of % of Total
Securities Options/SAR's
Underlying Granted to
Options/SAR's Employees Exercise or
Name Granted (#) in Fiscal Year Base Price ($/Sh) Expiration Date
- ---- ------------ -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Chester S. Shira 75,000 8.0% $0.60 (Cdn) November 3, 2003
Michael A. Spacciapolli 125,000 13.0% $0.60 (Cdn) November 3, 2003
Randie Burrell 30,000 3.2% $0.60 (Cdn) November 3, 2003
</TABLE>
Option Exercise and Holdings
The following table sets forth information concerning option exercises and
option holdings for the year ended December 31, 1998, with respect to the
Company's Chief Executive Officer and the Named Executive Officers:
<TABLE>
<CAPTION>
Aggregate Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
------------------------------------------------------------------------
Value Realized Number of Unexercised Value of unexercised
Shares Market Price at Options/SAR's at In-The-Money Options/SAR's
Acquired on Exercise less Fiscal Year End at Fiscal End ($U.S.)(1)
--------------- -----------------------
Name Exercise (#) Exercise Price($) Exercisable Unexercisable Exercisable Unexercisable
- ----- ------------ ----------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Chester S. Shira ___ --- 239,620 --- $123,004 ---
Michael A. Spacciapolli --- ___ 896,620 --- $460,265 ---
Randie Burrell --- --- 67,500 --- $ 34,650 ---
</TABLE>
_______________
(1) Based on the closing price of $.77 Canadian on the Vancouver Stock Exchange
on December 31, 1998 with a U.S. conversion rate of 1.50.
Compensation of Directors
All directors of the Company receive $500 for each meeting attended and are
reimbursed for their expenses to attend meetings.
Employment Agreements
The Company has employment agreements with Messrs. Spacciapolli and Shira,
which provide for employment by the Company 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 of
Directors. 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.
26
<PAGE>
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 each receive six
months severance pay. 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Royalty Agreement with Carbite, Inc. dated March 1, 1993, the
Company pays patent royalties to Chester S. Shira, Director of Research and
Development and Chairman of the Board. Mr. Shira is the inventor of the
technology used by Company in the design, manufacture and sale of its golf
equipment, and the owner of 7 U.S. patents, all of which have been assigned to
the Company in connection with the Royalty Agreement. The Royalty Agreement
provides for a royalty of $.50 per club on clubs sold by the Company employing
his inventions during the life of the patents. All royalty payments are
current. Mr. Shira can terminate the Royalty Agreement and regain possession of
the patents in the event Carbite, Inc. fails to timely pay his royalties or when
Carbite does not comply with a term or condition of the Royalty Agreement. For
the fiscal years ended December 31, 1998 and 1997, Mr. Shira was paid a total of
U.S. $168,455 and $124,181, respectively, in royalties. For the nine months
ended September 30, 1999, the Company paid $153,221 in royalties to Mr. Shira.
To date, substantially all of the Company's club sales have been subject to the
royalty.
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 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 the Company did
not have ready access to adequate credit or capital to launch the infomercial.
The Company has entered into Employment Agreements with its Chairman,
Chester S. Shira, and its President, Michael A. Spacciapolli, that run through
September 3, 2000 which provide for compensation to each of at least $125,000
per year. During the year ended December 31, 1998, Mr. Spacciapolli was paid
$200,719 U.S. and Mr. Shira was paid $158,817 U.S., by Carbite, Inc.
Randie Burrell, the Chief Financial Officer of the Company, has been
granted options to acquire a total of 67,500 shares of Common Stock, of which
17,500 shares are exercisable at $.80 Canadian per share, and the remaining
50,000 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 at $.85 Canadian per share.
27
<PAGE>
Chester S. Shira, Director of Research and Development and a Director of
the Company, has been granted options to acquire a total of 389,620 shares of
Common Stock, of which 150,000 shares are exercisable at $.87 Canadian per
share, and the remaining 239,620 shares are 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 1,444,120 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 450,000 shares are exercisable at
$.85 Canadian per share.
28
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
common stock, no par value ("Common Stock").
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 September 30, 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.
29
<PAGE>
PART II
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Vancouver Stock Exchange,
Canada under the symbol "CAB." The following table sets forth for the last two
fiscal years and for the nine months ended September 30, 1999, the high and low
sale prices for the Common Stock as reported on the Vancouver Stock Exchange.
The sale prices quoted are in Canadian dollars and are based on information
provided by the Vancouver Stock Exchange.
<TABLE>
<CAPTION>
Fiscal Year 1997 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter $2.35 $1.50
Second Quarter 1.90 1.55
Third Quarter 1.55 .90
Fourth Quarter 1.10 .55
Fiscal Year 1998
----------------
First Quarter $1.02 $ .50
Second Quarter .80 .60
Third Quarter 1.02 .60
Fourth Quarter .80 .40
Nine Months ended September 30, 1999
------------------------------------
First Quarter $1.16 $ .55
Second Quarter 1.05 .62
Third Quarter .80 .53
</TABLE>
As of September 30, 1999, there were approximately 1,100 holders of the
Company's Common Stock.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently anticipates it will retain all further earnings, if any,
for use in the operation and expansion of it business and does not anticipate
paying any cash dividends in the foreseeable future.
LEGAL PROCEEDINGS
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There were no changes in or disagreements with accountants on accounting
and financial disclosure.
30
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
Sales to United States Residents
Since December 1, 1996, the Company has 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.
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
31
<PAGE>
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.
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 of 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 of 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 a stock option; granted the Company's President, Michael
Spacciapolli, options to acquire an aggregate of 847,500 shares at an average
exercise price of $.82 Canadian; granted the Company's Chairman, Chester Shira,
an option to acquire 150,000 shares at an exercise price of $.87 Canadian per
share; 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. 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.
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.
32
<PAGE>
Sales to Non-United States Residents
Since December 1, 1996, the Company has 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 635,000 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.
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.
33
<PAGE>
15. 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.
16. 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.
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.
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:
"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.
34
<PAGE>
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 officer, 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 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 tortuous act of
any person, firm or corporation which whom or which 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.
35
<PAGE>
PART FS
INDEX TO FINANCIAL STATEMENTS
The following index lists the financial statements of the Company included in
this Registration Statement:
<TABLE>
<S> <C>
Independent Auditor's Report................................................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997................................. F-3
Consolidated Statements of Operations and Deficit for the years ended
December 31, 1998, 1997 and 1996............................................................. F-4
Consolidated Statements of Changes in Financial Position for the years ended
December 31, 1998, 1997 and 1996............................................................. F-5
Notes to Consolidated Financial Statements................................................... F-6
Unaudited Consolidated Balance Sheets for the nine months ended September 30, 1999 and 1998... F-22
Unaudited Consolidated Statements of Operations for the nine months ended
September 30, 1999 and 1998.................................................................. F-23
Unaudited Consolidated Statements of Changes in Financial Position for the
nine months ended September 30, 1999 and 1998................................................ F-24
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Carbite Golf Inc.
We have audited the consolidated balance sheets of Carbite Golf Inc. as at
December 31, 1998 and 1997 and the consolidated statements of operations and
deficit and changes in financial position for each of the years in the three
year period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 1998
and 1997 and the results of its operations and the changes in its financial
position for each of the years in the three year period ended December 31, 1998,
in accordance with generally accepted accounting principles in Canada. As
required by the Company Act (British Columbia), we report that, in our opinion,
these principles have been applied on a consistent basis.
Chartered Accountants
Abbotsford, Canada
March 2, 1999
F-2
<PAGE>
CARBITE GOLF INC.
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,154,678 $ 403,814
Accounts receivable 1,304,595 530,911
Inventory (Note 4) 1,999,251 2,071,667
Prepaid expenses 204,029 142,996
-----------------------------------------------------------------------------------
4,662,553 3,149,388
Capital assets (Note 5) 385,106 305,409
Patents and trademarks, net of accumulated
amortization of $68,603 (1997 - $54,143) 76,000 23,980
Deferred costs, net of accumulated amortization of
$500,783 (1997 - $273,383) 353,766 500,266
Goodwill, net of accumulated amortization of $335,481
(1997 - $45,481) 2,512,804 2,802,805
- ---------------------------------------------------------------------------------------
$ 7,990,229 $ 6,781,848
=======================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank loan $ - $ 18,846
Accounts payable and accrued liabilities 615,488 769,520
Current portion of long-term debt (Note 6) 12,960 -
Lease obligation - 6,857
-----------------------------------------------------------------------------------
628,448 795,223
Long-term debt (Note 6) 44,590 -
Shareholders' equity:
Share capital (Note 7) 9,777,421 8,685,374
Deficit (2,460,230) (2,698,749)
-----------------------------------------------------------------------------------
7,317,191 5,986,625
Commitments (Note 10)
Subsequent event (Note 13)
Contingency (Note 15)
- ---------------------------------------------------------------------------------------
$ 7,990,229 $ 6,781,848
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
______________________ Director
______________________ Director
Page F-3
<PAGE>
CARBITE GOLF INC.
Consolidated Statements of Operations and Deficit
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year end December 31
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $15,662,361 $ 2,230,232 $ -
Cost of sales 8,133,194 1,474,979 -
- --------------------------------------------------------------------------------------------------------
Gross margin 7,529,167 755,253 -
Expenses:
Advertising and promotion 5,110,717 992,527 116,272
Bad debts 41,221 50,741 -
Bank charges and interest 85,943 9,525 789
Consulting fees, wages and commissions 545,900 202,589 56,179
Depreciation 23,751 7,332 999
Insurance 34,423 5,645 -
Listing 9,710 2,859 5,650
Office and miscellaneous 217,173 18,226 5,442
Printing - 6,780 1,306
Professional fees 50,739 140,758 18,452
Rent 67,906 24,442 8,801
Repairs and maintenance 10,414 4,255 1,024
Telephone and utilities 27,238 8,242 1,488
Transfer agent fees 4,132 8,845 6,875
Travel 20,143 22,168 6,004
------------------------------------------------------------------------------------------------------
6,249,410 1,504,934 229,281
- --------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,279,757 (749,681) (229,281)
Other income (expenses):
Printing operations (Note 8) (52,025) (24,077) -
Research and development (345,900) (95,536) -
Equity in earnings (loss) of Carbite, Inc. - (226,240) 72,736
Amortization of deferred costs (227,400) (163,102) (110,281)
Amortization of goodwill, patents and trademarks (304,460) (99,624) -
Interest and other income 2,959 18,515 16,277
Loss (gain) on disposal of assets (57,954) - 18,335
Foreign exchange loss (3,658) (11,712) (5,919)
------------------------------------------------------------------------------------------------------
(988,438) (601,776) (8,852)
- --------------------------------------------------------------------------------------------------------
Net income (loss) before income taxes 291,319 (1,351,457) (238,133)
Income taxes (Note 9) 52,800 - -
- --------------------------------------------------------------------------------------------------------
Net income (loss) 238,519 (1,351,457) (238,133)
Deficit, beginning of year (2,698,749) (1,347,292) (1,109,159)
- --------------------------------------------------------------------------------------------------------
Deficit, end of year $(2,460,230) $(2,698,749) $(1,347,292)
========================================================================================================
Earnings (loss) per share (Note 11) $ 0.01 $ (0.11) $ (0.03)
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page F-4
<PAGE>
CARBITE GOLF INC.
Consolidated Statements of Changes in Financial Position
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Cash provided by (used in)
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 238,519 $ (1,351,457) $ (238,133)
Add (deduct):
Items not affecting working capital:
Depreciation 98,979 23,129 999
Equity in loss (earnings) of Carbite Inc. - 226,240 (72,736)
Amortization 531,860 262,726 110,281
Gain on disposal of joint venture investment - - (18,335)
Loss on disposal of capital assets 57,954 - -
Net changes in non-cash working capital balances
relating to operations:
Accounts receivable (773,684) 320,139 3,008
Inventory 72,416 18,735 -
Prepaid expenses (61,033) 126,813 23,430
Accounts payable and accrued liabilities (154,032) (289,488) 33,474
---------------------------------------------------------------------------------------------------------
10,979 (663,163) (158,012)
Investing activities:
Acquisition of net non-cash assets of
subsidiaries (Note 2(a)) - (3,260,256) -
Proceeds on sale of marketable securities - 29,184 -
Deferred costs incurred (80,900) (73,596) (121,091)
Patent and trademark costs incurred (66,479) - -
Investment in Carbite, Inc. - - (225,000)
Proceeds on disposal of joint venture investment - - 18,335
Purchase of capital assets (256,467) (35,254) -
Proceeds on disposal of capital assets 19,837 - -
---------------------------------------------------------------------------------------------------------------
(384,009) (3,339,922) (327,756)
Financing activities:
Issuance of common shares, net of share
subscriptions 842,047 4,489,690 1,326,098
Proceeds on convertible debenture 500,000 - -
Repayment of convertible debenture (250,000) - -
Proceeds on long-term debt 60,000 - -
Repayments on long-term debt (2,450) - -
Decrease in promissory note receivable - 80,257 388
Advances to associated companies - (1,036,029) -
Decrease in lease obligation (6,857) (3,610) -
Decrease in bank loan (18,846) (9,160) -
---------------------------------------------------------------------------------------------------------------
1,123,894 3,521,148 1,326,486
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash during the year 750,864 (481,937) 840,718
Cash and cash equivalents, beginning of year 403,814 885,751 45,033
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,154,678 $ 403,814 $ 885,751
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page F-5
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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.
2. Significant accounting policies:
(a) Basis of presentation:
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada which conform in
all material respects with accounting principles generally accepted in
the United States, except as disclosed in Note 12.
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.
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 common 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 1998, Carbite Acquisition Corp. changed its name to
Carbite Inc.
Page F-6
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(a) Basis of presentation (continued):
These transactions have been accounted for using the purchase method
with the results 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.
(b) Inventory:
Inventory is valued at the lower of cost and net realizable value.
(c) 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 received.
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.
Page F-7
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(d) 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.
(e) Capital assets:
Capital assets are stated at cost. Depreciation is provided over the
estimated useful lives of the assets.
(f) 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.
(g) 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.
(h) Foreign currency translation:
The Company has adopted the United States dollar as its reporting
currency (Note 3), 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.
(i) Use of estimates:
These financial statements have been prepared in accordance with
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.
Page F-8
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
3. Change in reporting currency:
Prior to January 1, 1997 the consolidated financial statements of the
Company were expressed in Canadian ("Cdn") dollars. As a result of a
significant portion of revenues, expenses and assets being denominated in
United States ("U.S.") dollars, the U.S. dollar became the principal
currency of the Company's business. Accordingly, the U.S. dollar was
adopted as the reporting currency for the consolidated financial statements
of the Company effective for its fiscal year ended December 31, 1997.
The 1996 financial statements were restated to reflect the U.S. dollar as
the reporting currency. The accounts were translated using the temporal
method (Note 2(h)).
4. Inventory:
---------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------
Golf inventory:
Raw materials $ 936,237 $1,058,663
Finished goods 1,063,014 1,001,127
-------------------------------------------------------------------
1,999,251 2,059,790
Printing supply inventory - 11,877
---------------------------------------------------------------------
$ 1,999,251 $2,071,667
---------------------------------------------------------------------
5. Capital assets:
---------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------
Office and computer equipment $ 151,523 $ 162,513
Manufacturing equipment 432,936 248,457
Printing equipment - 58,575
Automotive equipment 6,785 6,785
Leasehold improvements 20,430 39,406
---------------------------------------------------------------------
611,674 515,736
Less: accumulated depreciation 226,568 210,327
---------------------------------------------------------------------
$ 385,106 $ 305,409
=====================================================================
Page F-9
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
6. Long-term debt:
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
Bank loan, payable in monthly
instalments of $1,501 including interest
at bank prime rate plus 1.75% per annum,
due November 2002 $ 57,550 $ -
Less current portion 12,960 -
--------------------------------------------------------------------
$ 44,590 $ -
====================================================================
The Company has secured an operating line of credit of $300,000. The
operating line of credit bears interest at bank prime rate plus 2% per
annum. The Company has not drawn on the operating line as at year end.
The above bank loan and operating line of credit, are secured by assignment
of inventories, accounts receivable, equipment, and assignment of insurance
proceeds.
Principal repayments for the next four years are as follows:
1999 $ 12,960
2000 $ 14,250
2001 $ 15,700
2002 $ 14,640
Page F-10
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
7. Share capital:
Authorized:
50,000,000 Common shares with no par value
Issued:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Number
of shares Amount
-------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 5,586,751 $2,274,790
Issued in 1996:
For cash (net of offering costs of $46,468) 3,381,785 1,893,302
For services 150,000 27,592
-------------------------------------------------------------------------
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 7(a)) (125,000) -
Issued in 1998:
For cash (net of offering 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
=========================================================================
</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.
Page F-11
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
7. Share capital (continued):
(b) Share options:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Number Price range
of options (CAD $'s)
---------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 395,000
Granted 225,000 $1.35
Exercised (292,500) $0.60 to $0.94
Cancelled/expired (2,500) $0.60
---------------------------------------------------------------
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
===============================================================
</TABLE>
During fiscal 1998, a resolution was passed to reprice all outstanding
share options to CAD $0.60.
The following share options were outstanding at December 31, 1998:
-------------------------------------------------------------------
Number Exercise Expiry
of Shares Price Date
-------------------------------------------------------------------
(CAD$)
Director 20,000 0.60 October 1, 1999
Employees 162,500 0.80 April 14, 2000
Director 250,000 0.60 July 1, 2000
Directors 329,240 0.60 October 1, 2002
Employees 126,000 0.60 October 1, 2002
Employees 7,500 0.60 December 9, 2002
Director 607,000 0.01 March 1, 2003
Directors 250,000 0.60 March 3, 2003
Employees 659,000 0.60 March 3, 2003
-------------------------------------------------------------------
2,411,240
-------------------------------------------------------------------
No compensation resulted in the granting of these options.
Page F-12
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
7. Share capital (continued):
(c) Share purchase warrants:
The following share purchase warrants were outstanding at December 31
1998:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Number Exercise Expiry
of Shares Price Date
--------------------------------------------------------------
(CAD$)
<S> <C> <C> <C>
Warrants 1,454,545 0.55 February 20, 1999
Warrants 700,000 0.80 August 5, 1999
Warrants 678,750 0.52 November 30, 2000
--------------------------------------------------------------
2,833,295
--------------------------------------------------------------
</TABLE>
8. Printing operations:
--------------------------------------------------------------------------
Six months ended Four months ended
June 30, 1998 December 31, 1997
--------------------------------------------------------------------------
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)
--------------------------------------------------------------------------
In June 1998 the Company ceased its printing operations.
9. Income taxes and investment tax credits:
The 1998 income tax expense provision is comprised of California State
income tax. No provision has been recorded for U.S. Federal Income Taxes,
as the taxable income has been applied against Federal net operating loss
carryforwards which were previously not reflected in the accounts.
The Company has losses for tax purposes of approximately CAD $2,010,000
which are available to offset future years' taxable income in Canada
expiring as follows:
1999 CAD $ 142,000
2000 113,000
2001 97,000
2002 172,000
2003 475,000
2004 641,000
2005 370,000
----------
CAD $2,010,000
----------
F-13
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
9. Income taxes and investment tax credits (continued):
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.
The possible future income tax benefits of the Canadian losses and Canadian
unclaimed research and development expenditures have not been reflected in
the accounts.
10. Related party transactions:
The following amounts were paid to directors and officers of the Company:
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
Wages and fees to directors $ 14,231 $41,528 $ 34,910
Management salaries paid to
directors post Carbite, Inc.
acquisition (Note 2(a)) $375,215 $70,486 $ -
Royalties paid to a director post
Carbite, Inc. acquisition
(Note 2(a)) $168,445 $30,199 $ -
Consulting fees paid to a company
controlled by a director
$ - $30,000 $ -
Wages and fees paid to an officer
$ 84,537 $20,945 $ -
Interest paid to directors $ 3,548 $ - $ -
--------------------------------------------------------------------------
F-14
<PAGE>
- --------------------------------------------------------------------------------
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.
The royalty agreement with one of the directors 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.
11. Earnings 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 19,074,032 in 1998, 12,186,147 in 1997, and 7,914,341 in 1996.
The effect of the exercise of share options and share purchase warrants
outstanding is not materially dilutive in 1998, and antidilutive in 1997
and 1996.
F-15
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
12. 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 basis)
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. basis).
Had the Company followed the U.S. basis, the deferred cost section of the
balance sheet contained within the consolidated financial statements would
have been reported as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1998 1997
Canadian U.S. Canadian U.S.
Basis Basis Basis Basis
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred costs (Note 12(c)) $ 353,766 $ - $500,266 $ -
-------------------------------------------------------------------------
</TABLE>
Had the Company followed the U.S. basis, the shareholders' equity section
of the balance sheet contained within the consolidated financial
statements would have been reported as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1998 1997
Canadian U.S. Canadian U.S.
Basis Basis Basis Basis
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholders' equity:
Share capital $9,777,421 $9,777,421 $8,685,374 $8,685,374
Deficit (Note 12(c)) (2,460,230) (2,813,996) (2,698,749) (3,199,015)
-------------------------------------------------------------------------
$7,317,191 $6,963,425 $5,986,625 $5,486,359
-------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
12. Differences between generally accepted accounting principles in
Canada and the United States (continued):
Had the Company followed the U.S. basis, the statement of
operations contained within the consolidated financial statements
would have been reported as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations
under Canadian basis $1,279,757 $ (749,681) $(229,281)
Printing operations (Note 12(d)) (52,025) (24,077) -
Research and development (Note
12(d)) (345,900) (95,536) -
Amortization of goodwill, patents
and trademarks (Note 12(d)) (304,460) (99,624) -
Deferred costs incurred (Note 12(c)) (80,900) (73,596) (121,091)
-----------------------------------------------------------------------------------------------
Income (loss) from operations
under U.S. basis $ 496,472 $(1,042,514) $(350,372)
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) under Canadian
basis $ 238,519 $(1,351,457) $(238,133)
Deferred costs incurred (Note 12(c)) (80,900) (73,596) (121,091)
Amortization of deferred costs
(Note 12(c)) 227,400 163,102 110,281
-----------------------------------------------------------------------------------------------
Net income (loss) under U.S. basis $ 385,019 $(1,261,951) $(248,943)
-----------------------------------------------------------------------------------------------
</TABLE>
Page F-17
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
12. Differences between generally accepted accounting principles in
Canada and the United States (continued):
Had the Company followed the U.S. basis, the statement of cash flow
contained within the consolidated financial statements would have
been reported as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in) operating
activities under Canadian basis $ 10,979 $ (663,163) $(158,012)
Deferred costs incurred
(Note 12(b) and (c)) (80,900) (46,627) (93,499)
-----------------------------------------------------------------------------------------------
Cash used in operating activities
under U.S. basis $ (69,921) $ (709,790) $(251,511)
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash used in investing activities
under Canadian basis $ (384,009) $(3,339,922) $(327,756)
Acquisition of net non-cash assets
of subsidiaries (Note12(b)) - 3,273,710 -
Deferred costs incurred
(Note 12(c)) 80,900 73,596 121,091
-----------------------------------------------------------------------------------------------
Cash provided by (used in) investing
activities under U.S. basis $ (303,109) $ 7,384 $(206,665)
-----------------------------------------------------------------------------------------------
</TABLE>
Page F-18
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
12. Differences between generally accepted accounting principles in
Canada and the United States (continued):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by financing
activities under Canadian basis $1,123,894 $ 3,521,148 $1,326,486
Issuance of common shares for
acquisition of net non-cash assets
of subsidiaries
(Note 12(b)) - (3,273,710) -
Issuance of common shares for
services (Note 12(b)) - (26,969) (27,592)
-----------------------------------------------------------------------------------------------
Cash provided by financing
activities under U.S. basis $1,123,894 $ 220,469 $1,298,894
-----------------------------------------------------------------------------------------------
</TABLE>
(a) Accounting for income taxes:
Under the asset and liability method of Statement of Financial
Standards No. 109 ("SFAS 109"), deferred income tax assets and
liabilities are measured using enacted tax rates for the future
income tax consequences attributed to differences between the
financial statement carrying amount of existing assets and
liabilities and their respective tax basis. There is no effect
of applying the provision of SFAS 109 on the Company's
financial statements as the recognition criteria for deferred
tax assets has not been met.
Components of the Company's deferred income tax asset are as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Federal net operating loss carryforwards:
Canada $ 685,538 $ 655,769
United States - 329,827
-------------------------------------------------------------------------------------------
685,538 985,596
Less valuation allowance (685,538) (985,596)
-------------------------------------------------------------------------------------------
$ - $ -
-------------------------------------------------------------------------------------------
</TABLE>
A valuation allowance had been recorded to reduce the Federal
net operating loss carryforwards to an amount expected to be
realized through the reversal of temporary differences. As at
December 31, 1997, Carbite, Inc. had net operating loss
carryforwards of $942,362 in the United States. These losses
were fully used to offset Federal taxable income in 1998.
F-19
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
12. Differences between generally accepted accounting principles in
Canada and the United States (continued):
(a) Accounting for income taxes (continued):
The Company's provisions (benefits) for income taxes differ
from amounts computed by applying U.S. corporate income tax
rate of 35% and Canadian corporate income tax rate of 52% for
the following reasons:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------
<S> <C> <C>
Income tax provision (benefit) at the statutory rate:
United States $ 326,422 $ (334,759)
Canada (126,205) (234,211)
------------------------------------------------------------------------------------------
200,217 (568,970)
Increase (decrease) in valuation allowance for net
deferred tax assets (300,058) 554,182
Decrease in net deferred tax assets due to expiry of
loss carry-forwards and changes in exchange rates
96,436 -
Nondeductible expenses and other 3,405 14,788
------------------------------------------------------------------------------------------
Actual tax provision (benefit) $ - $ -
------------------------------------------------------------------------------------------
</TABLE>
(b) Shares issued for non-cash consideration:
Under U.S. GAAP, the issue of common shares as consideration
for the acquisition of net non-cash assets of subsidiaries or
for services does not impact the Company's cash flows, and
accordingly, these transactions are excluded from the
statement of cash flow.
(c) 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. Included in these
deferred costs were amounts for services for which common
shares were issued as consideration. (Note 12(b)).
(d) Income from operations:
Under U.S. GAAP, research and development and amortization
expenses, along with loss from printing operations, would be
included in income from operations, rather than reported
separately as other expenses.
13. Subsequent event:
Subsequent to December 31, 1998 warrants were exercised for
1,159,398 common shares at CAD $.55 per share, for total proceeds
of CAD $637,669.
F-20
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
14. Fair value of financial instruments:
For certain of the Company's financial instruments including
accounts receivable, accounts payable and accrued liabilities, and
lease obligation, 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 current rates
presently available to the Company for loans with similar terms and
maturity.
15. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use
two digits rather than four to identify a year. Date-sensitive
systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information using year 2000 dates is
processed. In addition, similar problems may arise in some systems
which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000, and, if not addressed, the impact on
operations and financial reporting may range from minor errors to
significant systems failure which could affect an entity's ability
to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
F-21
<PAGE>
CARBITE GOLF INC.
CONSOLIDATED BALANCE SHEETS (Stated in US Dollars)
September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS September 30 September 30
1999 1998
-----------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,066,715 $ 1,360,824
Trade Receivables 2,049,588 1,075,695
Inventory 2,684,377 2,087,290
Other Receivables 116,368 113,897
Prepaid Expenses 291,459 458,663
-----------------------------------
Total Current Assets 6,208,507 5,096,369
-----------------------------------
CAPITAL ASSETS (Net of Depr) 616,508 403,723
OTHER ASSETS
Goodwill 2,295,304 2,585,319
Investment in Carbite Inc.
Deferred Costs - Merger 151,986 268,447
Notes Receivable - Carbite Inc.
Patents 70,095 18,077
Infomercial (Net of Amort) 63,584 150,248
Deposits 2,016 2,016
-----------------------------------
Total Other Assets 2,582,985 3,024,107
-----------------------------------
-----------------------------------
TOTAL ASSETS $ 9,408,000 $ 8,524,199
===================================
LIABILITIES AND EQUITY
LIABILITIES
Accounts Payable 554,445 $ 604,728
Accrued Expenses 23,581
Line of Credit 240,865
Income Taxes Payable 396,122
Short Term Note Payable 500,000
-----------------------------------
Total Liabilities 1,215,013 1,104,728
-----------------------------------
SHAREHOLDERS EQUITY
Share Capital 10,437,829 9,562,649
Retained Earnings (Def) (2,457,542) (2,699,172)
Foreign Exchange Adjustment 7,506 2,555
Net Income (Loss) - YTD 205,194 553,439
-----------------------------------
Total Stockholders Equity 8,192,987 7,419,471
-----------------------------------
-----------------------------------
TOTAL LIABILITIES & EQUITY $ 9,408,000 $ 8,524,199
===================================
</TABLE>
F-22
<PAGE>
CARBITE GOLF INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Stated in US Dollars)
NINE MONTHS ENDING SEPTEMBER 30, 1999 with comparative figures for 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30 September 30
1999 1998
-----------------------------------
<S> <C> <C>
Sales $ 14,062,812 $ 12,168,503
Cost of Sales 7,142,713 5,017,305
-----------------------------------
Gross Profit 6,920,099 7,151,198
Operating Expenses 5,730,869 5,980,105
-----------------------------------
Net Income from Operations 1,189,230 1,171,093
-----------------------------------
Other Income (Expenses) (7,866) (39,372)
Research and Development (341,703) (241,744)
Amortization of Goodwill & Deferred Costs (304,883) (304,868)
Gain on Discontinued Printing Operations 68,138
Loss on Disposal of Fixed Assets (31,670)
-----------------------------------
Net Income before Taxes 602,916 553,439
-----------------------------------
Provision for Income Taxes (397,722) 0
===================================
Net Income after Taxes $ 205,194 $ 553,439
===================================
</TABLE>
F-23
<PAGE>
CARBITE GOLF INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION (Stated in US Dollars)
NINE MONTHS ENDED SEPTEMBER 30, 1999 with comparative figures for 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30 September 30
Cash provided by (used for): 1999 1998
-----------------------------------
<S> <C> <C>
Operating Activities
Income (Loss) $ 205,194 $ 553,439
Add (deduct)
Items not affecting working capital
Depreciation 122,713 38,808
Amortization 113,203 89,787
Gain on discontinued printing operations (68,138)
Net increase in non-cash operating
working capital relating to operations (1,603,243) (1,180,466)
Subtotal (1,230,271) (498,432)
-----------------------------------
Investing Activities
Purchase of capital assets (370,285) (181,793)
Leasehold Improvements (20,430)
Disposed Assets 65,101
Amortization of Deferred Costs 304,845 304,868
Other Assets (42,292) (92,134)
-----------------------------------
Total (107,732) 75,612
-----------------------------------
Financing Activities
Issuance of Common Shares 660,408 877,275
Short Term Note Payable 500,000
Bank Line of Credit 183,315
Income Taxes Payable 396,122
Adjustment in Retained Earnings 2,689
Foreign Exchange Adjustment 7,506 2,555
-----------------------------------
Total 1,250,040 1,379,830
-----------------------------------
Increase (decrease) in cash position (87,963) 957,010
Cash position at beginning of period 1,154,678 403,814
-----------------------------------
Cash position at end of period 1,066,715 $ 1,360,824
===================================
</TABLE>
F-24
<PAGE>
PART III
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------------
2.1 Agreement and Plan of Merger between Carbite, Inc., Carbite Golf,
Inc. and Carbite Acquisition 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*
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 Loan Agreement dated April 13, 1998 between the Company and James
A. and Susan V. Henderson as Co-Trustees of the Henderson Living
Trust*
10.8 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*
10.9 Form of Stock Option Agreement*
10.10 Employee Confidentiality and Invention Agreement*
10.11 Commercial Security Agreement between Carbite, Inc. and Scripps
Bank dated May 15, 1999**
10.12 Trademark License Agreement between Carbite Golf, Inc. and Daiwa
Seiko, Inc. dated September 16, 1999*
10.13 Exclusive Distribution Agreement between Carbite Golf, Inc. and
Daiwa Seiko, Inc. dated September 16, 1999*
13. Form F-X Appointment of Agent for Service of Process and
Undertaking*
27. Financial Data Schedule*
____________________
* Previously filed
** Filed herewith
III-1
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Amendment No. 1 to this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
CARBITE GOLF, INC.
Date: January 7, 2000 By: /s/ Michael A. Spacciapolli
-----------------------------
Michael A. Spacciapolli
Chief Executive Officer
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael A. Spacciapolli Director and Chief Executive Officer January 7, 2000
- ------------------------------
Michael A. Spacciapolli
/s/ Chester S. Shira Chairman of the Board and Director of January 7, 2000
- ------------------------------
Chester S. Shira Research and Development
By: Michael A. Spacciapolli
Attorney-in-Fact
/s/ Randie Burrell Chief Financial Officer January 7, 2000
- ------------------------------
Randie Burrell
/s/ David Nairne Director January 7, 2000
- ------------------------------
David Nairne
By: Michael A. Spacciapolli
Attorney-in-Fact
/s/ James Henderson Director January 7, 2000
- ------------------------------
James Henderson
By: Michael A. Spacciapolli
Attorney-in-Fact
</TABLE>
III-2
<PAGE>
EXHIBIT 10.11
COMMERCIAL SECURITY AGREEMENT
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$1,000,000 5-15-2000 53104 19 501
- ----------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Borrower: CARBITE, INC. Lender: Scripps Bank
6330 NANCY RIDGE ROAD, SUITE 107 Corporate Lending - Kearny Mesa
SAN DIEGO, CA 92121 9005 Complex Drive
San Diego, CA 92123
</TABLE>
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT is entered into between CARBITE, INC.
(referred to below as "Grantor"); and Scripps Bank (referred to below as
"Lender"). For valuable consideration, Grantor grants to Lender a security
interest in the Collateral to secure the indebtedness and agrees that Lender
shall have the rights stated in this Agreement with respect to the Collateral,
in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
Collateral. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
All inventory, chattel paper, accounts, equipment and general
intangibles, together with the following specifically described
property: investment Property & Fixtures
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, tools, parts, supplies, increases,
and additions to and all replacements of and substitutions for any
property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
Grantor. The word "Grantor" means CARBITE, INC., its successors and
assigns.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the indebtedness.
Indebtedness. The word "Indebtedness" means Note dated October 28, 1998 in
the principal amount of $300,000.00 & increased to $1,000,000.00 by Change
in Terms Agreement dated May 12, 1999 and Note dated November 30, 1998 in
the principal amount of $60,000.00 from Grantor to Lender, together with
all renewals of, extensions of, modifications of, refinancings of,
consolidations of and substitutions for the note or credit agreement.
Lender. The word "Lender" means Scripps Bank, its successors and assigns.
Note. The word "Note" means the Change in Terms Agreement between Borrower
and Lender dated May 12, 1999, which modifies the following described
existing indebtedness:
AS EVIDENCED BY:
PROMISSORY NOTE DATED OCTOBER 28, 1998 IN THE AMOUNT OF $300,000.00
CHANGE IN TERMS AGREEMENT DATED FEBRUARY 22, 1999 IN THE AMOUNT OF
$540,000.00
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual security interest
in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
<PAGE>
Page 2
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever actions are requested by Lender to perfect
and continue Lender's security interest in the Collateral. Upon request of
Lender, Grantor will deliver to Lender any and all of the documents
evidencing or constituting the Collateral, and Grantor will note Lender's
interest upon any and all chattel paper if not delivered to Lender for
possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and continuation
of the perfection of Lender's security interest in the Collateral. Grantor
promptly will notify Lender before any change in Grantor's name including
any change to the assumed business name of Grantor. This is a continuing
Security Agreement and will continue in effect even though all or any part
of the indebtedness is paid in full and even though for a period of time
Grantor may not be indebted to Lender.
No Violation. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At any time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
Location of the Collateral. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of California, without the prior written consent of
Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
Collateral Schedules and Locations. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and equipment,
Grantor shall deliver to Lender, as often as Lender shall require, such
lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral.
Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien of Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith such law, ordinance or regulation and withhold compliance during
any proceeding, including appropriate appeals, so long as Lender's interest
in the Collateral, in Lender's opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health
and Safety Code, Section 25100, et seq., or other applicable state or
Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. The terms "hazardous waste" and "hazardous substance" shall
<PAGE>
Page 3
also include, without limitation, petroleum and petroleum by-products or
any fraction thereof and asbestos. The representations and warranties
contained herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a) releases
and waives any future claims against Lender for indemnity or contribution
in the event Grantor becomes liable for cleanup or other costs under any
such laws, and (b) agrees to indemnify and hold harmless Lender against any
and all claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of the
indebtedness and the satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
canceled or diminished without at least ten (10) days' prior written notice
to Lender and not including any disclaimer of the insurer's liability for
failure to give such a notice. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be impaired
in any way by any act, omission or default of Grantor or any other person.
In connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss
payable or other endorsements as Lender may require. If Grantor at any time
fails to obtain or maintain any insurance as required under this Agreement,
Lender may (but shall not be obligated to) obtain such insurance as Lender
deems appropriate, including if it so chooses "single interest insurance,"
which will cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of proceeds to pay all of the
indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement.
Default on Indebtedness. Failure of Grantor to make any payment when due on
the indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
<PAGE>
Page 4
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days, or such lesser time as required by state law, before
the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the indebtedness secured by this Agreement and shall
be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
Collect Revenues, Apply Accounts. Lender, either by itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the indebtedness or apply it to payment of the indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, ir similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of the
State of California. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any
<PAGE>
Page 5
automatic stay or injunction), appeals, and any anticipate post-judgment
collection services. Grantor also shall pay all court costs and such
additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
Preference Payments. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
Waiver of Co-obligor's Rights. If more than one person is obligated for the
indebtedness. Borrower irrevocably waivers, disclaims and relinquishes all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
ADDITIONAL PROVISIONS. This Security Agreement is backed by UCC-1 filed
November 9, 1998 as file #9831661571.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MAY 12,
1999.
GRANTOR:
CARBITE, INC.
By: ___________________________________ By: __________________________________
CHESTER S. SHIRA, Chairman Michael A. Spacciapolli, President
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$300,000 10-28-1998 5-15-1999 53104 19 501
- ---------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: CARBITE, INC. Lender: Scripps Bank
6330 NANCY RIDGE ROAD, SUITE 107 Corporate Lending
SAN DIEGO, CA 92121 9005 Complex Drive
San Diego, CA 92123
<TABLE>
<S> <C> <C>
Principal Amount: $300,000.00 Initial Rate: 10.000 Date of Note: October 28, 1998
</TABLE>
PROMISE TO PAY. CARBITE, INC. ("Borrower") promises to pay to Scripps Bank
("Lender"), or order, in lawful money of the United States of America, the
principal amount of Three Hundred Thousand & 00/100 Dollars ($300,000.00) or so
much as may be outstanding, together with interest on the unpaid outstanding
principal balance of each advance. Interest shall be calculated from the date of
each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on May 15,
199.9. In addition, Borrower will pay regular monthly payments of accrued unpaid
interest beginning November 15, 1998, and all subsequent interest payments are
due on the same day of each month after that. Interest on this Note is computed
on a 365/365 simple interest basis; that is, by applying the ratio of the annual
interest rate over the number of days in a year, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the Wall Street
Journal Prime Rate as published in the Money Rates section. When a range of rate
is shown, the higher rate will be used. (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute
index after notice to Borrower. Lender will tell Borrower the current index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often than
each time that Prime Rate changes as shown in the Money Rates section of the
Wall Street Journal. The index currently is 8.000% per annum. The interest rate
to be applied to the unpaid principal balance of this Note will be at a rate of
2.000 percentage points over the index, resulting in an initial rate of 10.000%
per annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
minimum interest charge of $100.00. Other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $5.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material
<PAGE>
respect either now or at the time made or furnished. (e) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(f) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (g) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor of
this Note. (h) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (I) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate
on this Note to 7.000 percentage points over the index, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (Including any increased rate). Lender
may hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by Lender
in the State of California. if there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of San Diego County, the
State of California. This Note shall be governed by and construed in accordance
with the laws of the State of California.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: CHESTER S. SHIRA,
Chairman, and MICHAEL A. SPACCIALOLLI, President. Borrower agrees to be liable
for all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender. The
unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer printouts. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement between Lender and Borrower.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
<PAGE>
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY 0F THE NOTE.
BORROWER:
CARBITE, INC.
By:___________________________ By:__________________________________
CHESTER S. SHIRA, Chairman Michael A. Spacciapolli, President
variable Rate. Line of credit.
<PAGE>
EXHIBIT 10.11
CHANGE IN TERMS AGREEMENT
Borrower: CARBITE, INC. Lender: Scripps Bank
6330 NANCY RIDGE ROAD, SUITE 107 Corporate Lending - Kearny Mesa
SAN DIEGO, CA 92121 9005 Complex Drive
San Diego, CA 92123
Principal Amount: $1,000,000.00 Date of Agreement: May 12, 1999
DESCRIPTION OF EXISTING INDEBTEDNESS.
AS EVIDENCED BY:
PROMISSORY NOTE DATED OCTOBER 28, 1998 IN THE AMOUNT OF $300,000.00
CHANGE IN TERMS AGREEMENT DATED FEBRUARY 22, 1999 IN THE AMOUNT OF $540,000.00.
DESCRIPTION OF COLLATERAL.
AS DESCRIBED IN:
COMMERCIAL SECURITY AGREEMENT DATED MAY 12, 1999.
DESCRIPTION OF CHANGE IN TERMS.
1. INCREASE NOTE AMOUNT TO $1,000,000.00
2. LOAN AGREEMENT DATED MAY 12, 1999 SUPERCEDES ALL PRIOR LOAN AGREEMENTS
3. CARBITE GOLF, INC. IS ADDED AS A GUARANTOR
4. EXTEND MATURITY DATE TO MAY 15, 2000
4. THE VARIANCE ON THIS NOTE IS DECREASED TO PRIME +1.0% OVER THE INDEX.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
COLLATERAL. This Note is secured by UCC-1 filed November 9, 1998 as file
#9831661571, all of which also secures Note dated November 30, 1998 in the
amount of $60,000.00.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY 0F THE AGREEMENT.
BORROWER:
CARBITE, INC.
By:___________________________ By: ______________________________________
CHESTER S. SHIRA, Chairman Michael A. Spacciapolli, President
