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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
AMENDMENT No. 3 to the
----------------------
Form 10-SB
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GENERAL FORM OF REGISTRATION OF THE SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR (g) OF THE SECURITIES ACT OF 1934
Commission File Number: 0-28707
CARBITE GOLF, INC.
(Name of Small Business Issuer in its charter)
British Columbia, Canada 33-0770893
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9985 HUENNEKENS STREET
SAN DIEGO, CA 92121
(Address of principal executive offices)
Issuer's telephone number (858) 625-0065
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT: None
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
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ITEM 1. DESCRIPTION OF BUSINESS
History and Development of the Company
Carbite Golf, Inc., through its wholly-owned subsidiary Carbite, Inc.,
develops, manufactures, and sells golf equipment. Our primary products are
putters and wedges, both of which incorporate our patent-protected technology.
We also offer irons and wood sets and distribute some products manufactured by
others. We market and sell our products through a diverse combination of (i)
wholesale sales to on-course and off-course golf retail shops and selected
sporting goods retailers; and (ii) direct response sales to consumers through
television infomercials, direct mail, telemarketing and the internet.
The Company was incorporated in 1985 in British Columbia, Canada under the
name Q Data Systems, Inc. After a public offering in Canada in 1986, our stock
has been publicly traded on the Canadian Venture Exchange (previously Vancouver
Stock Exchange) since 1986. From 1985 to 1996, the Company was involved in a
variety of non-golf businesses, including electronic devices and an automobile
dealership. In 1991, the name was changed to Consolidated Q Data Systems, Inc.
In September, 1997, we entered the golf business when we completed the
acquisition of (i) Carbite, Inc., which had developed a line of wedges and other
golf clubs using patented powder metallurgy technology; and (ii) Advanced Golf
Systems, Inc. which was Carbite's joint venture partner in a television
infomercial for ViperBite clubs. In connection with these acquisitions, we
changed our name to Carbite Golf, Inc., effective January 4, 1996.
We acquired Carbite, Inc. in two steps - in September 1994, we invested
$1.4 million U.S. to acquire a 50% interest and an option to acquire the
remaining 50%. In September, 1997, our newly incorporated, wholly-owned
subsidiary, Carbite Acquisition Corp., acquired the remaining 50% in exchange
for 7,078,872 shares - 6,263,872 shares as consideration for the merger and
815,000 shares as bonus shares to management of Carbite, Inc. - and 912,524
share purchase warrants, for a total deemed purchase price of $3,665,435 U.S.
Immediately following the acquisition, Carbite, Inc. was merged into Carbite
Acquisition Corp. which then changed its name to Carbite Inc.
We acquired Advanced Golf Systems, Inc. in September, 1997 when our newly
incorporated, wholly-owned subsidiary, AGS Acquisition Corp., acquired 100% of
its shares in exchange for 700,000 shares of the Company and 700,000 share
purchase warrants, for a total deemed purchase price of $362,460. Immediately
following the acquisition, Advance Golf Systems, Inc. was merged into AGS
Acquisition Corp.
By December 31, 1998, our only assets were all the stock in Carbite, Inc.
and Advanced Golf Systems. Since Advanced Golf's only asset is its joint venture
with Carbite, it is considered a discontinued operation and will be formally
dissolved by year end 2000.
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Proprietary Technology Applied to Golf Clubs
Our patented metallurgy technology gives us the ability to produce products
which we believe have demonstrable benefits over competing products.
Dual Density
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Our technology allows us to fabricate and join different types of metals
with different densities into one club head. This gives us the ability to place
most of the weight in a clubhead in the heel and toe without any loss of
structural integrity. In our Polar Balanced putters, for example, we combine
highly dense tungsten at the extreme heel and toe with lightweight aluminum in
the center section. Our patented process creates a molecular bonding of these
materials into an integrated structure such that the tungsten heel and toe
pieces become a functional part of the club head. We believe this is superior to
other mechanical techniques which attempt to apply "stick-on" weights to the
heel and toe. The net effect of this extreme heel-toe weighting is a bigger
sweet spot; the performance impact is that off-center hits will perform better.
High Friction Inserts
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Our insert technology permits the molecular bonding of tungsten carbide
and diamond particles into a bronze face plate to form a durable roughened
striking surface. On wedges, this insert improves the ability of all players to
spin the ball and to control their shots. On putters, this insert allows for a
putt to start off in a straighter course. Our inaugural insert product was the
CheckMate wedge in 1992 and was later extended to other wedges, including the
Tour Insert Wedge introduced in 1998 and to certain models of the Polar
Balanced Putters.
Surface Technology and Plating
------------------------------
We have also developed a surface coating process which attaches hard
particles to the striking surface by way of a flame spray. This coating has
performance benefits similar to the insert, but is less expensive to
manufacture. This technology was first used on the ViperBite wedge introduced in
mid-1995 and later expanded to ViperBite iron sets. We also used this process on
our Carbite Gear Effect Metal Woods (1-3-4-5-7-9) which combines surface coating
and an offset head for an easy-to-hit alternative to the long iron.
Products
Our products are all technically advanced and high quality. The product
line extends to all levels of play (from beginners to professionals) and a broad
range of retail price points ($100 - $200 for putters and wedges). Through 1999,
substantially all our products were sold under the Carbite brand name.
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The following table sets forth the contribution to net sales attributable
to our product groups for the periods indicated:
Year Ended December 31,
1999 1998
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Putters $15,826,820 85.5% $12,354,328 78%
Woods $ 557,327 3.0% $ 1,876,607 12%
Wedges $ 1,758,536 9.5% $ 1,094,687 7%
Other $ 370,218 2.0% $ 441,260 3%
Net Sales $18,510,901 100% $15,776,882 100%
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Polar Balanced Putters
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In the Polar Balanced Putter, a substantial portion of the total putter-
head weight is strategically placed at the toe and heel. This technology is
designed to reduce club head rotation at impact, even on off-center hits. The
Polar Balanced series of putters are designed to compensate for off-center hits
by moving more weight to the heel and toe than most conventionally shaped
putters which we believe makes them more accurate and forgiving than other
putters.
Polar Balanced Putters are available in the Z series and the D series. The
Z series has six models (ZG, ZH, ZI, ZM, ZP and ZL), all with steel or aluminum
shafts. The Z putters have tungsten weights in the extreme heel and toe
molecularly bonded to an ultra light center section of aluminum. The ZG and ZH
also incorporate our original bronze tungsten-carbide face insert. The D series
has seven models (DB, DC, DD, DE, DF, DG, and DH). They are stainless steel with
tungsten weights encapsulated in the heel and toe and are offered as a lower
price point complement to the Z series.
Gear Effect Metal Woods
-----------------------
Gear Effect Metal Woods are designed to impart proper spin on the ball at
the point of impact that keeps it working to the center of the fairway. A
mis-hit towards the toe will generally move back to the intended target line. We
believe this feature helps to ensure more consistent directional control instead
of slices or hooks. The exclusive high friction club face grips the ball at
impact. The offset head is designed to prevent slices by keeping the hands ahead
of the ball at impact. The lightweight grip and shaft are designed to provide
for greater club head speed for increased distance. The sole is designed to pick
the ball cleanly from the tightest lies to the deepest rough. Gear Effect Metal
Woods are available in Driver, 3 Wood, 4 Wood, 5 Wood, 7 Wood and 9 Wood, all in
graphite shafts.
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Tour Insert Wedges
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The Tour Insert Wedge is our current wedge product which incorporates the
patented high-friction insert. The insert blends powdered soft bronze with
diamond and tungsten carbide particles designed to deliver extended wear and
a rough striking surface. This technology was designed to provide performance
through spin control so the ball holds the green from any approach shot. Tour
Insert Wedges are available in three loft configurations (52E Approach, 56E Sand
and 60E Lob) with steel or graphite shafts. We are also in development on a
wedge product which will incorporate the heel-toe weighting of the Polar
Balanced Putters.
Tungsten Tour Irons
-------------------
Tungsten Tour Irons are designed to bias the weight toward the heel or toe
to help square the club face at impact. Unique weighted inserts made from a
blend of 70% copper and 30% tungsten are designed to modify the club handling
with the goal of reducing hooks and slices. For the long irons, the weighting is
moved toward the heel. For shorter clubs, the weight is shifted toward the toe.
These irons also feature a progressive offset with a mid-size cavity back head.
Tungsten Tour Irons are available in full sets of 3-Iron through Pitching Wedge,
in graphite or steel shaft.
Team Daiwa
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In September 1999, we acquired the rights to sell Daiwa products in the
United States. Initially, we will introduce Team Daiwa bags and gloves to green
grass and off course accounts. At December 31, 1999, this program was still in
development.
Product Design and Development
We believe that the development of new products and the enhancement of
current product lines is necessary for our growth and success. Our research and
development expenses for 1999 and 1998 were $560,616 and $345,000, respectively.
We intend to continue to invest in R&D and product development in the future.
Sales and Marketing
We sell our products through a variety of trade channels and support these
sales through a combination of diverse marketing vehicles.
Retail Sales. We sell primarily to U.S. retailers. To generate retailer
loyalty and maintain a high quality reputation, we do not currently sell to
price sensitive general discount warehouses or membership chains. In 1999 and
1998, sales to retailers accounted for approximately 69% and 46% of total sales.
Retail accounts are handled by a national network of independent sales
representatives supported by our executive office and a telemarketing team of 12
employees in San Diego. At
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December 31, 1999, we had 32 independent sales representatives who receive a
commission on qualifying sales and are free to sell for other golf equipment
companies.
All product orders from retailers and other customers are subject to
cancellation or rescheduling by the customer prior to shipment with limited or
no penalties. While we believe our relationships with customers is satisfactory,
there can be no assurance we will be able to maintain such relationships in the
future.
International Sales. We market our products outside the United States
through independent distributors. The primary foreign market is Japan but we
also sell to Korea, United Kingdom, Germany, Sweden, Puerto Rico and the
Philippines. International sales accounted for 10% and 6% of our net sales for
1999 and 1998.
Our primary foreign distributor is a United States company, HSN Direct,
which sells the Polar Balanced putter and other products through infomercials in
Japan. Sales to this distributor were approximately $1,744,668 (9.4% of overall
net sales) for 1999 and approximately $1,122,993 (9% of overall net sales) for
1998.
Customer Service Support. We believe that superior customer service can
significantly enhance our marketing efforts. We maintain an in-house customer
service department for both wholesale and direct consumer trade and a 24-hour
7-day-a-week telemarketing company answers customer calls generated by our
infomercials.
Advertising and Promotion. We promote our products through a cost-
effective combination of public relations, promotion, print advertising, and
printed sales materials which invoke the theme of a "material advantage" through
technology. We have avoided general image advertising (in television or print),
choosing instead to focus the marketing budget on direct response advertising
which has a more predictable impact on sales and can be a cost-effective way to
simultaneously build brand name recognition, communicate a product story, and
sell product. We regularly place direct response advertisements in national
print publications such as Golf Digest and Golf World and has used television
infomercials for specific products.
Infomercials. We have successfully used television infomercials to launch
new products. The ViperBite in 1995, the Gyroseven utility wood in 1997, and
the Polar Balanced Putter in 1998 were all introduced through infomercials. We
believe that good infomercials can enhance consumer awareness of products, make
immediate sales, and expand the retail customer base.
Direct Response. In addition to direct response advertising, we pursue
direct consumer sales with sophisticated direct mail and telemarketing programs,
spearheaded by the Company's in-house telemarketing department in San Diego.
These programs include direct mail programs, outbound phone calls and e-mail
blasts to current and prospective consumer buyers, website with shopping cart
feature for on-line purchasing, internet contests and programs designed to build
our consumer data base for future sales, and participation in consumer shows.
All these programs are designed to sell product directly to consumers which
will build sales and expand brand awareness. Since most direct response sales
are made by credit card, we can secure cash payment before shipment without any
credit risk or accounts receivable management. Most direct response sales are,
however, made with a guaranteed 30-90 day return privilege. Historically,
returns range from 20% to 40%. The success of the direct response campaign is
dependent on careful management of the return rate.
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Product Endorsements. We promote our products to touring golf
professionals. In August, 1999, we entered into a five-year Endorsement
Agreement with professional golfer Fuzzy Zoeller whereby Zoeller will play,
endorse, and assist in the development of Carbite products worldwide. The
Agreement calls for payments to Zoeller in a combination of cash and stock of
$138,000 for the first six months (August, 1999 to February 2000) and five
annual payments of cash and stock thereafter with a dollar value of $300,000 in
Year 2, $300,000 in Year 3, $500,000 in Year 4, $550,000 in Year 5 and $575,000
in Year 6. We have the right to terminate the arrangement if 2001 sales do not
reach $25 million. We also have short-term arrangements with Chris Starkjohann
(Buy.com Tour), Mary Bryan (LPGA television analyst), and Johnny Gonzales (local
San Diego teaching pro).
Carbite Golf Web Site. Our products are promoted and offered for sale on
our internet web site (www.carbitegolf.com).
Our total advertising and marketing related expenses were approximately
$6.2 and $6.5 million for 1999 and 1998.
Manufacturing, Assembly and Raw Materials
The principal components of our golf clubs (club heads, shafts and grips)
are manufactured by outside suppliers and shipped to us for assembly. The
suppliers are selected based on the quality of the finished products, materials,
dependability and pricing. All club heads are designed by us and we provide the
manufacturers with detailed specifications. They are inspected prior to shipment
by a quality control inspector employed by us in Taiwan.
All assembly operations, including painting, stenciling and the application
of trade dress, are completed at our facility in San Diego, California. All
components are inspected upon arrival from the suppliers and are assembled under
the supervision of a full-time quality control inspector who conducts numerous
visual inspections at various points along the assembly process.
Dependence on Major Customers
During 1999 and 1998, no customer accounted for more than 10% of net sales
revenue.
Intellectual Property
We are the owner, by way of assignment by Chester Shira, of eight U.S.
registered patents which give the Company the exclusive right to produce golf
clubs incorporating the proprietary powder metallurgy processes set forth in
them. Eight additional patent applications are pending, but have not been
issued. Under a Royalty Agreement dated March 1, 1993, the Company pays Mr.
Shira a royalty of $.50 per club using the initial four patents which were
assigned in March, 1993. The eight patents are: No. 4,768,787 (issued 9/6/88);
No. 4,992,236 (issued 2/12/91); No. 5,062,638 (issued 1/5/91); No. 5,094,810
(issued 3/10/92); No. 5,217,227 (issued 6/8/93); No. 5,669,825 (issued 9/23/97);
No. 5,755,626 (issued 5/26/98); and No. 6,027,010 (issued 2/23/00).
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We sell most of our products under the Carbite brand name. We own the
following U.S. registered trademarks: "Carbite;" "Check Mate;" "Multi Density;"
"Dual Density;" and "Diatanium." The "Carbite" mark is also registered in Japan
and Germany.
Licenses
We have had success in licensing our technology to other companies.
In January, 1995, we licensed to Taylor Made Golf Company the rights to use
our bronze high friction inserts under the Taylor Made brand name on irons. In
March, 1997, that agreement was extended through December 31, 1999. For fiscal
years 1999 and 1998, we received royalty fees of $ -0- and $60,101 from Taylor
Made.
On October 28, 1998, we entered into a License Agreement with KZG Golf,
Inc. for the brazing of copper tungsten wood heads manufactured for Orlimar
Golf's TriMetal wood products. The term of the License Agreement is five years
and requires a minimum annual payment of $5,000. For 1999 and 1998, we received
$221,308 and $161,571 in royalties from KZ Golf.
Team Daiwa
In September, 1999, we acquired the rights to distribute Daiwa products in
North America and to develop new products using the Daiwa name. Specifically, we
entered into two agreements with Daiwa Seiko of Japan:
A Trademark License Agreement which permits us to use the Daiwa name and
other trademarks of Daiwa on golf products in the United States. The term
is five years with an option for an additional five-year term. We pay a
royalty of 6% of the FOB purchase price on all products sold under the
license. The agreement is subject to automatic termination if: Carbite
declares bankruptcy; the Distribution Agreement is terminated; Carbite
withdraws from the business of manufacturing, selling or distributing Daiwa
products; control of Carbite is transferred to a direct golf or fishing
tackle competitor of Daiwa, or if any Licensed Products are adjudged to
infringe any third party's patent rights. Daiwa may in its sole discretion
terminate if Carbite fails to make minimum royalty payments for two
consecutive quarters. The annual minimum royalty amounts are $75,000 in
Year 1, $225,000 in Year 2, $250,000 in Year 3, $375,000 in Year 4 and
$450,000 in Year 5.
A Distribution Agreement which designates us as the exclusive distributor
of Daiwa golf products in the United States for a term of five years with
an option to renew for an additional five years. The agreement grants Daiwa
a warrant, exercisable through September, 2002, to buy 300,000 shares of
our common stock at fair market value. We are also required to pay 10% of
Daiwa net sales for advertising and promotion of Daiwa products in the
United States. The Agreement is subject to automatic termination if:
Carbite declares Bankruptcy; the License Agreement terminates; Carbite
withdraws from the business of manufacturing, selling or distributing Daiwa
products; control of Carbite is transferred to a direct golf or fishing
tackle competitor of Daiwa; or any Daiwa products are adjudged to infringe
the patent of a third party. The Agreement also terminates if Carbite fails
to meet the Minimum Purchase Obligation for two consecutive years. Under
the Minimum Purchase Obligation, Carbite is required to "undertake to
purchase" Daiwa products totaling 50% of annual target amounts of $3.5
million (9/16/99 - 9/15/2000), $10 million (9/16/00 - 9/15/01), $15 million
(9/16/01 - 9/15/02), $20 million (9/16/02 - 9/15/03), and $25 million
(9/16/03 - 9/15/04).
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Employees
As of December 31, 1999, we had 75 full-time employees, including 30 in
product assembly and shipping, 28 in sales and marketing, and 17 in management,
finance and administration. The employees are not represented by a union, and we
consider our relations with employees to be satisfactory.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations addresses our performance for the fiscal years ended
December 31, 1999 and 1998, and should be read in conjunction with our
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-SB.
Carbite, Inc.'s net sales are primarily derived from sales of golf
equipment to on-course and off-course golf shops, selected sporting goods
retailers, international distributors and direct sales to consumers. Carbite,
Inc.'s net sales are accounted for on an accrual basis for all wholesale sales
and on a cash basis for direct consumer sales.
Carbite, Inc. does not manufacture the components required to assemble its
golf clubs, relying instead on component suppliers. Costs of the clubs consist
primarily of component parts, including the head, shaft and grip. Cost of goods
sold also includes labor and occupancy costs in connection with the inspection,
testing and assembly of component parts at our facility in San Diego,
California. Operating expenses are composed primarily of selling and marketing
expenses, general and administrative expenses, and research and development
expenses. Selling and marketing expenses include advertising, marketing,
salaries and commissions.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The following table sets forth the operating results expressed as a
percentage of net sales for the periods indicated.
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Statement of Operations (Year Ended December 31)
1999 1998
Net Sales 18,510,901 100.0% $15,776,882 100.0%
Cost of goods sold 9,468,562 51.2% 6,775,240 43.0%
Gross profit 9,042,339 48.8% 8,991,642 57.0%
Operating expenses 8,674,002 47.0% 8,057,785 51.0%
Net operating income 368,337 2.0% 933,857 6.0%
Other expense 2,051 .01% 52,724 .4%
Amortization of goodwill and def costs 539,842 2.9% 531,860 3.4%
Gain on discontinued printing operation 66,673 .4% -0- 0.0%
Loss on disposal of fixed assets -0- 0% 57,954 0.4%
Income (loss) before income taxes (106,883) -.6% 291,319 1.8%
Income taxes 98,600 .5% 52,800 0.3%
Net income (loss) (205,483) -1.1% 238,519 1.5%
Net Sales
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Net consolidated sales for Carbite Golf Inc. for 1999 were $18.5 million
compared to $15.8 million for 1998. This increase in sales was principally due
to increases in sales of our Polar Balanced Putter product line to retail
accounts and the further growth of our total account base from approximately
2,000 to approximately 4,000. Absent new product introductions, we do not
anticipate continued high growth in the sales of the Polar Balanced Putter
because the product now has good retail penetration and the infomercial which
launched the product line has now reached the end of its natural lifecycle.
Gross Profit
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Gross profit, as a percentage of sales, decreased to 49% in 1999 from 57%
in 1998, primarily because of a change in the mix of our sales between
infomercial and retail. Infomercial sales are made directly to consumers at
retail prices. Sales to retailers are at wholesale prices. We launched the
Polar Balanced Putter by infomercial in 1998 and then introduced it to retail.
Initially, the majority of sales are high margin infomercial sales which are
ultimately overtaken by lower margin but higher volume sales to retail accounts.
In 1999, the percentage of sales to retailers was larger than in 1998. We
anticipate that this trend toward more traditional wholesale margins near 50%
will continue as our brand matures and infomercial sales become a decreasing
percentage of overall sales.
Operating Expenses
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Operating expenses, including R&D, increased to $8,674,002 for 1999
compared to $8,057,785 for 1998, but decreased as a percentage of sales to 47%
in 1999 versus 51% in 1998. This decrease was principally due to reduced
Selling Expenses as noted below.
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Selling Expenses
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Selling expenses were $6,216,698 in 1999 versus $6,454,481 in 1998 but were
less as a percentage of sales in 1999 vs. 1998 at 33.6% versus 40.9%. As we
rolled back our Polar Balanced Putter infomercial, media spending was decreased.
G&A Expenses
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The G&A expenses increased to $1,896,688 in 1999 from $1,309,429 in 1998,
to 10.2% of sales in 1999 vs. 8.3% of sales in 1998. There were additional
administrative personnel added in 1999 to plan and organize further growth as
well as the expense associated with a new upgraded computerized information
system. We also had increased expense for Bad Debt, including a reserve of
$120,000 for one significant customer. Bad debt expense for 1999 was $396,505
and we ended the year with a reserve for doubtful accounts totalling $240,000.
Any further deterioration in Accounts Receivable beyond that reserve would
dramatically change operating results.
Research and Development Expenses
---------------------------------
R&D increased in 1999 to $560,616 versus $345,900 in 1998. This spending
was in improvements of Z series putters and development time of the new Polar
Balanced Wedge to be introduced in 2000. There was also expense in improving
the various insert materials and processes for the current putters and wedges.
R&D expenses will continue to be substantial, particularly as we further develop
the Polar Balanced Wedge and a new family of putters.
Other Expenses
--------------
Other expenses were the same for amortization of deferred costs, patents,
and goodwill. These costs were $539,842 in 1999 and $531,860 in 1998. There
was a loss on the sale of assets in 1998 of $57,954 vs. no dispositions in 1999.
The dissolution of the printing subsidiary in Canada produced other income of
$66,673 in 1999 vs. expenses from the operation of $52,025 in 1998.
Income Taxes
------------
These provisions are computed at a combined rate of 43% for U.S. Federal
and State income taxes with exceptions of nondeductible goodwill and some U. S.
future tax assets from losses carried forward and unclaimed research and
development expenditures.
Capital Expenditures
--------------------
Capital expenditures were $400,990 in 1999 and $354,115 in 1998, an
increase of $46,875, principally due to an investment in software for an
improved information system. This system will help in our future growth.
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Liquidity and Capital Resources
-------------------------------
We have historically financed our business through cash flow from
operations and the private placement of equity and/or debt securities. Such
funds have been supplemented from time to time with short-term borrowings from
commercial lenders.
In February, 1998, $842,000 was raised through private equity placements
made outside the United States. In February 1999, an additional equity of
approximately $530,000 was raised through the exercise of 1,454,545 warrants
issued in a February, 1997 private placement made outside the United States. An
additional $100,000 of equity was raised in March, 1999 through the exercise of
employee options.
In April, 1998, we borrowed $500,000 from a private party to finance the
initial launch of the Polar Balanced putter infomercial. The Loan Agreement
dated August 14, 1998 with James A. Henderson and Susan V. Henderson, as Co-
Trustees of The Henderson Living Trust, ("Henderson") provided for a term of one
year at an interest rate of 10% and included a conversion provision whereby
Henderson had the right to convert the loan to units of the Company's stock and
warrants to purchase an additional share. In November, 1998, Henderson
converted $250,000 of the loan to 678,750 units. In December, 1998, the Company
repaid the remaining $250,000 of the loan.
We have two commercial credit facilities, both with Scripps Bank in San
Diego, California, including a $1,000,000 Revolving Credit Facility, which
expires on November 15, 2000 and a $60,000 term equipment loan due November 15,
2002. As of December 31, 1999, we had drawn $191,925 under the Credit Facility
and the full balance of $60,000 remained due on the equipment loan. Both credit
facilities are at the lender's general refinance rate of interest. The
Revolving Credit Facility is collateralized by our accounts receivable. The
equipment loan is collateralized by the equipment purchased from the loan
proceeds.
Net cash used by operating activities was $782,769 for the year ended
December 31, 1999 compared to $10,979 net cash provided in 1998. The company had
cash on hand at December 31, 1999 of $660,000.
We believe that, as of December 31, 1999, current cash, cash flow from
operations, and the Company's $1,000,000 credit facility should be sufficient to
meet operating needs and capital expenditures to maintain sales at the current
levels. But, to finance additional growth and new product introductions planned
through fiscal years 2000 - 2001, we believe it will require approximately
$1,000,000 in equity or debt private placement financing. We are currently
pursuing private placement arrangements. We are also investigating possible
financing from asset lenders, particularly as our inventory levels rise for a
new year. And we are pursuing internal programs designed to increase
profitability and hence improve internal cash flow.
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Computer Systems and Year 2000 Compliance
As of May 1, 1999, we initiated a system-wide upgrade of all computer
systems which are intended to provide state-of-the-art systems and hardware for
financial, manufacturing, customer services and telemarketing functions. The
system was operational by December 1, 1999 and has not experienced any Year 2000
problems. Total costs associated with the new system, including Year 2000
compliance, were approximately $100,000. Overall, the new system has improved
operations, although there remain some on-going implementation difficulties.
Risk Factors That May Affect Future Results and Financial Condition
The Company's operations and financial results are subject to numerous
risks, many of which are beyond the Company's control, including:
Dependence on Polar Balanced Putter
During 1999 and 1998, approximately 85.5% and 81.9% of our net sales were
derived from sales of the Polar Balanced Putter line. Such sales are expected to
account for a substantial portion of our net sales for some time. A decline in
demand for, or average selling prices of, the Polar Balanced Putter would have a
material adverse effect on our business. By December 31, 1999, the informercial
program which first introduced the Polar Balanced Putter had nearly reached the
end of its useful life and can not be expected to drive substantial sales into
the future.
Our continued growth and success depend, therefore, on our ability to
successfully develop and introduce new products accepted in the marketplace.
Historically, a large portion of new golf club technologies and designs have
been rejected by consumers. No assurance can be given that new products we are
developing now or will develop in the future will meet with market acceptance.
Plus, our competitors are always working on new products. Accordingly, our
operating results could fluctuate as a result of the amount, timing and market
acceptance of new product introductions by us and our competitors.
Our Clubs Must Comply With USGA Regulations
The design of new golf clubs is greatly influenced by the rules and
interpretations of the U.S. Golf Association ("USGA"). Although the golf
equipment standards established by the USGA generally apply only to competitive
events sanctioned by that organization, we believe it is critical that new clubs
comply with USGA standards. No assurance can be given that any new products
will receive USGA approval or that existing USGA standards will not be altered
in ways that adversely affect the sales of our products.
We Need to Develop and Protect Proprietary Technology
Our ability to compete effectively in the golf club market will depend, in
part, on our ability to maintain the proprietary nature of our technologies and
products. We own, by way of assignment from Chester Shira, eight U.S. patents
which are incorporated in some of our
13
<PAGE>
products. These patents may, however, have limited commercial value or may lack
sufficient breadth to adequately protect the aspects of our products to which
the patents relate. The Company's U.S. patent rights do not preclude competitors
from developing or marketing products similar to our products in international
markets.
There can be no assurance that competitors, many with greater resources
than us, will not apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products.
We are Dependent on Continued Growth in the Golf Industry
Our financial performance is dependent in large part upon the current and
anticipated market demand for golf equipment. During 1998 and early 1999, the
golf equipment industry experienced periods of oversupply. There can be no
assurance that such growth will return and that the slowdown will not continue.
A reduced rate of growth in the demand for golf equipment due, for example, to
competitive factors, technological change or otherwise, may materially adversely
affect the markets for the Company's products.
We are a Small Player in a Highly Competitive Industry
The market for golf clubs is highly competitive. Our competitors include a
number of established companies, most of which have greater financial and other
resources. We could, therefore, face substantial competition from existing or
new competitors that introduce and successfully promote golf clubs that achieve
market acceptance. There can be no assurance that our marketing strategy will
not be emulated by others, thereby diluting our message or forcing us to adopt a
new marketing strategy. Such competition could result in significant price
erosion or increased promotional expenditures, either of which could have a
material adverse effect on the business. There can be no assurance that we will
be able to compete successfully against current and future sources of
competition.
14
<PAGE>
We are in a Seasonal Business Dependent on Discretionary Consumer Spending
Golf generally is regarded as a warm weather sport and sales of golf
equipment historically have been strongest during the second and third quarters,
weakest during the fourth quarter. Sales of golf clubs are dependent on
discretionary consumer spending and, as such, may be affected by general
economic conditions. A decrease in consumer spending generally or in golf
spending specifically could result in decreased spending on golf equipment,
which could have a material adverse effect on our business. Because most
operating expenses are relatively fixed in the short term, we may be unable to
adjust spending sufficiently in a timely manner to compensate for any unexpected
sales shortfall. If technological advances by competitors or other competitive
factors require us to invest significantly greater resources than anticipated in
research and development or sales and marketing efforts, our business could be
materially adversely affected. Accordingly, we believe that period- to-period
comparisons of results of operations should not be relied upon as an indication
of future performance. The results of any quarter are not indicative of results
to be expected for a full fiscal year.
We Will Need Future Capital and Additional Financing
We estimate that we may need significant funding, in addition to our
present capital, to be able to fully develop and expand our business. Our
future capital requirements will depend upon many factors, including the extent
and timing of acceptance of our products in the market, commitments to third
parties to develop and manufacture products, the progress of our R & D efforts
and our operating results. In 1999, we raised approximately $942,000 in
additional capital.
We Must be Able to Manage Growth
We recently experienced a period of rapid growth that has resulted in new
and increased responsibilities for existing management personnel. Our growth
has placed, and is expected to continue to place, a strain on our systems and
resources to accommodate this recent growth. To compete effectively and manage
future growth, if any, we will be required to continue to implement and improve
our operational, financial and management information systems, procedures and
controls on a timely basis and to expend, train, motivate and manage our
workforce. There can be no assurance that our personnel, systems, procedures
and controls will be adequate to support its existing or future operations. Any
failure to implement and improve
15
<PAGE>
our financial and management systems or to expand, train, motivate or manage
employees could have a material adverse effect on the business.
We Are Dependent on Key Personnel
Our success depends upon the performance of our senior management team.
There is strong competition for qualified personnel in the golf club industry,
and the inability to continue to attract, retain and motivate other key
personnel could adversely affect our business.
We Review Possible Acquisitions, But They Can Be Risky
We regularly review possible acquisition opportunities and may make future
acquisitions of complementary services, technologies, product designs or
businesses in the future. We have no letters of intent or agreements for any
acquisitions. There can be no assurance that future acquisitions, if any, will
be completed or that, if completed, any such acquisition will be effectively
assimilated into our business. Acquisitions involve numerous risks, including,
among others, loss of key personnel of the acquired company, the difficulty
associated with assimilating the personnel and operations of the acquired
company, the potential disruption of our ongoing business, the maintenance of
uniform standards, controls, procedures and policies, and the impairment of our
reputation and relationships with employees and customers. In addition, any
future acquisitions could result in the issuance of dilutive equity securities,
the incurrence of debt or contingent liabilities, and amortization expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on our business.
Outstanding Options and Warrants May Dilute Ownership
As of December 31, 1999, there were outstanding options to purchase an
aggregate of 2,944,240 shares of common stock and outstanding warrants to
purchase an aggregate of 791,250 shares of common stock. As of December 31,
1999, we had 22,426,486 shares of common stock outstanding. The exercise of
such outstanding options and warrants would dilute the percentage ownership of
our stock, and any sales in the public market of common stock underlying such
stock options could adversely affect prevailing market prices for the common
stock. Moreover, the terms upon which we would be able to obtain additional
equity capital could be adversely affected by the existence of such options or
warrants.
We Sell to Customers Who May Present Unknown Credit Risks
We primarily sell our products to golf equipment retailers and
distributors, and directly to customers via infomercials and direct response
programs. We perform ongoing credit evaluations of our customers' financial
condition and generally require no collateral from these customers. The 1998-
1999 downturn in the retail golf equipment market resulted in delinquent or
uncollectible accounts for some of our customers. Management does not foresee
any immediate improvement in the golf equipment market, and therefore expects
this trend to continue. Accordingly, there can be no assurance that our results
of operations or cash flows will not be adversely impacted by the failure of our
customers to meet their obligations.
16
<PAGE>
We Must Keep Up With Technological Changes
The manufacture and design of golf clubs has undergone significant changes
with respect to design and materials in recent years. The introduction of new
or enhanced technologies or designs by competitors could render our products
less marketable. Our ability to compete successfully will depend to a large
degree on our ability to innovate and respond to changes and advances in its
industry.
We Face The Risk of Technical Problems or Product Defects
There is no assurance, despite testing and quality assurance efforts, that
technical problems or product defects will not be found, resulting in loss of or
delay in market acceptance and sales, diversion of development resources, injury
to our reputation or increased service and support costs, any of which could
have a material adverse effect on the Company's business. Moreover, there is no
assurance that we will not experience difficulties that could delay or prevent
the development and introduction of products and services, that new or enhanced
products and services will meet with market acceptance, or that advancements by
competitors will not erode our position or render our products and services
obsolete.
We Depend on a Limited Number of Component Suppliers
We assemble all of our branded clubs at the San Diego facility. We do not
manufacture the components required to assemble the golf clubs. We are
dependent on a limited number of suppliers and do not have written supply
agreements with any of them. Three suppliers for heads, all based in the Far
East; three suppliers for shafts, all based in the Far East; and three suppliers
for grips, one based in the Far East. Therefore, our success will depend on
maintaining our relationships with existing suppliers and developing
relationships with new suppliers.
We plan our orders to manufacturers based upon the forecasted demand for
our products. Actual demand may be more or less than the forecasted demand.
Since our overseas club head vendors generally require at least 45-60 days lead
times to produce heads after a purchase order is placed, and since shipments
from these vendors average 20-25 days, our ability to quickly expand our
manufacturing capacity for new products is limited. If we are unable to produce
sufficient quantities of new products in time to fulfill actual demand, it could
limit our sales and adversely affect our financial performance. If actual
demand is less than forecasted, we could have excess inventories and related
obsolescent charges that could adversely affect financial performance.
17
<PAGE>
We Rely on Independent Domestic Sales Representatives
Sales of our products are dependent, in part, on a nationwide network of
independent sales representatives. While we believe that our relationships with
sales representatives and customers are satisfactory, there can be no assurance
that we will be able to maintain such relationships. Our sales representatives
are not exclusive and may also provide services for other golf club equipment
manufacturers that offer product lines competitive with ours. Although we work
closely with our sales representatives, we cannot directly control such
representatives' sales and marketing activities. There can be no assurance that
these representatives will effectively manage the sale of our products or that
our selling efforts will prove effective.
We Rely on Foreign Distributors for International Sales
During 1999 and 1998, sales to international customers, primarily through
one customer which markets products in Japan, accounted for approximately 9.4%
and 6.0% of our net sales. Accordingly, if this distributor ceases to purchase
golf clubs, sales will be reduced significantly. We rely exclusively on this
and other foreign distributors to market and sell our products outside the
United States. Although we work closely with its foreign distributors, we
cannot directly control such distributors' sales and marketing activities and,
accordingly, cannot manage our product sales in foreign markets. Our foreign
distributors may also distribute, either on behalf of themselves or other golf
club equipment manufacturers, other product lines, including product lines that
may be competitive with ours. Additionally, our international sales may be
disrupted or adversely affected by events beyond our control, including currency
fluctuations and political or regulatory changes.
Forward-Looking Statements
This Form 10-SB contains "Forward-looking statements" about our plans,
strategies, objectives, expectations, intentions, anticipated growth, and
possible acquisitions. Other statements that are not historical facts may also
be forward-looking statements. When used in this report, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions are generally intended to identify forward-looking statements. These
statements are only predictions and actual results could differ materially .
Factors that might cause such a difference are discussed throughout this
form 10-SB including the section "Risk Factors" on pages 13 to 18. Any forward-
looking statement speaks only as of the date we made the statements.
ITEM 3. DESCRIPTION OF PROPERTY
For all of 1999, our principal offices were located at 6330 Nancy Ridge
Drive in San Diego, California. In October, 1999, we entered into a lease for
new facilities located at 9985 Huennekens Street, San Diego, California. We
relocated to the new facility in February, 2000, after expiration of the prior
lease in January, 2000. The new facility includes approximately 26,000 square
feet of office, warehouse, manufacturing and research and development space.
The base rent is $20,185 per month and our lease runs through February, 2004.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of December 31, 1999 by: (i) each
person who is known to own beneficially more than five percent of the Company's
common stock; (ii) each of the Company's directors; (iii) each Named Executive
Officer; and (iv) all directors and executive officers as a group.
18
<PAGE>
<TABLE>
<CAPTION>
Amount of
Common Stock Approximate
and Nature of Percent of
Beneficial Beneficial
Name and Address of Beneficial Owner/(1)/ Ownership Ownership/(2)/
----------------------------------------- --------------- ----------------
<S> <C> <C>
Chester S. Shira/(3)/........................................ 4,568,130 20.36%
Michael A. Spacciapolli(4)/.................................. 1,587,694 7.07%
Randie Burrell/(5)/.......................................... 234,400 1.04%
David Nairne/(6)/............................................ 349,570 1.56%
James Henderson/(7)/......................................... 1,465,072 6.53%
All directors and executive officers as a group (5 persons).. 8,204,866 36.50%
</TABLE>
_______________
(1) Unless otherwise indicated, the address of each person is in care of the
Company at 9985 Huennekens Street, San Diego, California 92121. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options, warrants
or convertible securities that are currently exercisable, or exercisable
within 60 days of December 31, 1999 are deemed outstanding for computing
the percentage of the person holding such options, warrants or convertible
securities but are not deemed outstanding for computing the percentage
owned by any other shareholder listed. Except as indicated by footnote and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shares as beneficially owned by them.
(2) Percentage ownership is based on 22,426,486 shares outstanding as of
December 31, 1999.
(3) Includes 239,620 shares which Mr. Shira has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of December 31, 1999.
(4) Includes 1,164,120 shares which Mr. Spacciapolli has the right to acquire
upon exercise of outstanding options and all of such options were
exercisable as of December 31, 1999.
(5) Includes 77,500 shares which Mr. Burrell has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of December 31, 1999.
(6) Includes 20,000 shares which Mr. Nairne has the right to acquire upon
exercise of outstanding options, and all of such options were exercisable
as of December 31, 1999.
(7) Includes a warrant to acquire 678,750 shares of Common Stock exercisable at
$.80 per share through April, 1999, and exercisable at $.95 per share
through April, 2000, and all of the shares underlying the warrant are
exercisable as of December 31, 1999.
19
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
As of December 31, 1999, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Chester S. Shira............... 71 Director of Research and Development and Chairman of the Board
Michael A. Spacciapolli........ 47 President, Chief Executive Officer and Director
Randie Burrell................. 47 Chief Financial Officer
David Nairne................... 45 Director
James Henderson................ 48 Director
</TABLE>
Chester S. Shira is the founder of our wholly-owned subsidiary, Carbite,
Inc., and has been our Chairman of the Board since 1988. From 1988 to 1994 he
also served as President and Chief Executive Officer of the Company. Mr. Shira
has been Chairman of the Board and Director of Research and Development since
1997. Mr. Shira spent 11 years managing all aspects of welding, forging and
metal finishing development for North American Rockwell and four years with
Lincoln Electric Company, working in the areas of application engineering and
process controls. He has over 40 years experience as a metallurgist and welding
engineer. Mr. Shira has a BA from Ohio State University, and is a registered
professional metallurgical engineer in California and Ohio.
Michael A. Spacciapolli joined Carbite, Inc. in 1992 as Executive Vice
President. He has been the President, Chief Executive Officer and a Director of
Carbite, Inc. since 1995 and was the Chief Financial Officer from 1992 to 1998.
Mr. Spacciapolli has been the President, Chief Executive Officer and a Director
since 1997. From 1988 to 1992, Mr. Spacciapolli was the Director of Business
Development for the accounting firm of Sterres, Alpert and Carne. Prior to
joining Sterres, Alpert and Carne, Mr. Spacciapolli was a Vice President and
District Manager for Wells Fargo Bank with responsibility for 18 branch
locations and over 200 employees in San Diego. Mr. Spacciapolli has a BS in
Accounting from Rochester Institute of Technology. In May, 2000, Mr.
Spacciapolli was named Vice Chairman and John Pierandozzi was named President.
Randie Burrell joined the Company as Chief Financial Officer in 1998. From
June 1995 through August 1997 he was the Managing Partner of the ViperBite
Company, a partnership between Advanced Golf Systems, Inc. and Carbite, Inc.
From 1993 to 1995 he was the Chief Financial Officer for Advanced Golf Systems,
Inc. In May, 2000, Mr. Burrell resigned to join another company.
David Nairne was appointed as a director in 1996. Mr. Nairne is President
of Cedaridge Development and Management LTD, a private company in real estate
based in Vancouver,
20
<PAGE>
Canada. Cedaridge provides equity financing to other developers, as well as
undertaking developments for its own account in both Canada and the United
States. Prior to joining Cedaridge, Mr. Nairne was Vice President of Communities
Southwest in Irvine, California from August, 1993 to November, 1995. Communities
Southwest was a major developer of residential communities throughout southern
California. Mr. Nairne received his Bachelor of Commerce degree in 1997 and his
Bachelor of Laws degree in 1978.
James Henderson was elected as a director in May, 1999. Mr Henderson was
the Chief Executive Officer of Advanced Machine Programming from 1980- 1996.
From 1996 to present, Mr. Henderson has been a consultant.
We have a currently effective directors and officers liability insurance
policy.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth compensation paid for the fiscal years ended
December 31, 1999 and 1998 to the Chief Executive Officer and the other
executive officers (collectively the "Named Executive Officers") whose total
annual salary and bonus exceed $100,000 in the fiscal year ended December 31,
1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation/(2)/ Awards
--------------------------------- --------
Securities
Other Annual Underlying All other
Salary Bonus Compensation Options/SAR's Compensation
Name and Principal Position Year ($) ($) ($)/(3)/ ($) ($)/(1)/
--------------------------- ---- ----- --- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Chester S. Shira, Chairman of the Board and 1999 140,000 25,000 174,637
Director of Research and Development 1998 128,817 30,000 168,445 75,000
1997 128,817 124,181
Michael A. Spacciapolli, President and Chief 1999 150,000 12,500 697,500
Executive Officer 1998 140,719 60,000 125,000
1997 140,719
Randie Burrell, Chief Financial Officer/(1)/ 1999 120,000 10,000
1998 96,000 47,500
</TABLE>
_____________
(1) Mr. Burrell joined the Company in 1998.
(2) The compensation described in this table does not include certain
perks and other personal benefits received by the Named Executive
Officers, the value of which does not exceed the lesser of $50,000 or
10% of the Named Executive Officers total annual salary and bonus.
(3) Represents royalties paid to Mr. Shira pursuant to a Royalty Agreement
dated March 1, 1993 between the Company and Mr. Shira and pursuant to
an arrangement with the Company whereby he received 1/3 of all
royalties received from licensee KZ Golf.
21
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning stock option grants
made to the Chief Executive Officer and each of the other Named Executive
Officers for the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------
Number of % of Total
Securities Options/SAR's
Underlying Granted to
Options/SAR's Employees Exercise or
Name Granted (#) in Fiscal Year Base Price ($/Sh) Expiration Date
---- -------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Michael A. Spacciapolli 450,000 37.0% $0.85 (Cdn) March 26, 2004
Michael A. Spacciapolli 247,500 21.0% $0.77 (Cdn) March 23, 2004
Randie Burrell 10,000 1.0% $0.42 (Cdn) December 31, 2004
</TABLE>
Option Exercise and Holdings
The following table sets forth information concerning option exercises and
option holdings for the year ended December 31, 1999, with respect to Chief
Executive Officer and the Named Executive Officers:
<TABLE>
<CAPTION>
Aggregate Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
---------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options/SAR's at In-The-Money Options/SAR's
Value Realized Market Fiscal Year End at Fiscal Year End ($U.S.)(1)
Shares Acquired on Price at Exercise less ---------------------------- ------------------------------
Name Exercise (#) Exercise Price Exercisable Unexercisable Exercisable Unexercisable
--- ------------ -------------- ---------------------------- ------------------------------
($US)
----
<S> <C> <C> <C> <C> <C> <C>
Chester S. Shira --- --- 239,620 -- -0- ---
Michael A. Spacciapolli 150,000 $ 20,689 1,164,120 -- -0- ---
Randie Burrell --- --- 77,500 -- -0- ---
</TABLE>
___________________
(1) Based on the closing price of $.43 Canadian on the Vancouver Stock
Exchange on December 31, 1999 with a U.S. conversion rate of 1.45.
Compensation of Directors
We reimburse directors for expenses in connection with attending Board
and Committee meetings, but do not pay them for serving as Directors.
22
<PAGE>
Employment Agreements
We have maintained employment agreements with Messrs. Spacciapolli and
Shira, which provide for employment for a three year term beginning September 3,
1997, at an annual salary of not less than $125,000, and such other periodic and
extraordinary compensation deemed appropriate by the Board. Following the three
year term, their employment shall renew automatically for one year on each
anniversary date unless either party provides notice of non-renewal.
Messrs. Spacciapolli and Shira's employment agreements also provide that in
the event their employment is terminated pursuant to the employment agreement,
or a notice of non-renewal is issued by the Company, they shall continue to be
paid for a period of six months. In the event either of them are terminated
other than pursuant to the employment agreements, they shall each receive the
compensation provided for in their employment agreements for the remainder of
the term.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Royalty Agreement dated March 1, 1993, we pay royalties to
Chester S. Shira, Director of Research and Development and Chairman of the
Board. The Royalty Agreement provides for a royalty of $.50 per club on clubs
employing any of the inventions set forth in the four patents assigned to us by
Mr. Shira in March, 1993. The term of the Agreement is coextensive with the life
of each of the four patents. Thereafter, as to the inventions underlying each
patent, the Agreement may be extended upon mutual agreement with a royalty of
$.30 on each club. All royalty payments are current. For 1999 and 1998, we paid
Mr. Shira a total of $115,017 and $99,381, in connection with the 1993 Royalty
Agreement.
We have also paid Mr. Shira royalties in connection with licenses of other
patents owned by the Company to certain third parties. In 1999 and 1998, we
paid Mr. Shira $58,600 and $67,398 as one-third of all royalties we received in
1999 and 1998 from KZ Golf in connection with our License Agreement with KZ Golf
dated October 28, 1998. In 1998, we paid Mr. Shira $1,667 as one-third of the
royalties received by us from New Abiding.
By an Agreement dated April 14, 1998, James A. Henderson (a Director as of
May 19, 1999) and Susan V. Henderson as Co-Trustees of the Henderson Living
Trust ("Henderson") made a loan to the Company in the amount of $500,000. The
loan term was for a period of one year (callable after six months) at an
interest rate of 10%. The loan agreement included a conversion provision under
which Henderson had the right to convert the loan amount into units consisting
of one share of common stock and one two-year warrant (collectively, "Units") to
purchase an additional common share at CDN $.80 in the first year and CDN $.95
in the second year at a price per unit of CDN $.80 per unit. In November, 1998,
the units were repriced to $.52 Canadian with the warrant repriced at $.52 in
the first year and $.60 Canadian in the second year. As incentive to make the
loan, Henderson was paid a "Bonus" equal to 12% of the $500,000
23
<PAGE>
loan, paid in shares of common stock at a per share price of CDN $.80 per share.
In November, 1998, Henderson converted $250,000 of the loan to 678,750 Units,
which included one share of common stock at $.52 Canadian per share with one
two-year warrant to purchase an additional share at $.52 Canadian in the first
year and $.60 Canadian in the second year. The remaining $250,000 of the loan
was repaid by the Company on December 4, 1998. The proceeds of this loan were
used to finance the initial launch of the Polar Balanced Putter infomercial at a
time when we did not have ready access to adequate credit or capital to launch
the infomercial.
The initial conversion price on The Henderson loan of CDN $0.80 per share
was not in the money relative to the market price at the date it was set. When
the conversion price was reduced to CDN $0.52 per unit in November 1998, the
market price was not in excess of the revised conversion price. Accordingly, at
neither the initial agreement nor the repricing date was there a beneficial
conversion option which would require recognition in accordance with EITF 98-5.
The bonus shares issued as an incentive to make the loan were recorded at their
fair value at the issuance date and recognized as an expense in the statement of
operations.
During the year ended December 31, 1999, Messrs. Spacciapolli and Shira
were paid $162,500 and $165,000, respectively, in salary and bonus.
Randie Burrell, the Chief Financial Officer, has been granted options to
acquire a total of 77,500 shares of Common Stock, of which 17,500 shares are
exercisable at $.80 Canadian per share, and the remaining 60,000 shares are
exercisable at $.60 Canadian per share.
Mr. Nairne, a director, has been granted an option to acquire a total of
20,000 shares of Common Stock, exercisable at $.60 Canadian per share.
Chester S. Shira, Director of Research and Development and a Director, has
been granted options to acquire a total of 239,620 shares of Common Stock,
exercisable at $.60 Canadian per share.
Michael A. Spacciapolli, the President, Chief Executive Officer and a
director, has been granted options to acquire a total of 1,164,120 shares of
Common Stock. 607,000 shares are exercisable at $.01 Canadian per share;
139,620 shares are exercisable at $.60 Canadian per share; 247,500 shares are
exercisable at $.77 Canadian per share, and 170,000 shares are exercisable at
$.85 Canadian per share.
ITEM 8. LEGAL PROCEEDINGS
None
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Common Stock Market
-------------------
Our common stock trades on the Canadian Venture Exchange, Canada under the
symbol "CAB." The following table sets forth for the periods indicated the high
and low closing prices for the common stock provided by the Canadian Venture
Exchange.
24
<PAGE>
Fiscal Year 1999
----------------
First Quarter $1.16 $.55
Second Quarter 1.05 .62
Third Quarter .80 .53
Fourth Quarter .65 .35
Fiscal Year 1998
----------------
First Quarter
Second Quarter $1.02 $.50
Third Quarter .80 .60
Fourth Quarter 1.02 .60
.80 .40
We have authorized capital stock of 50,000,000 shares of common stock, no
par value.
As of December 31, 1999, we had 22,426,486 shares of common stock
outstanding, with approximately 192 holders of records.
We have not paid or declared any cash dividends on shares of our common
stock and do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain any future earnings for use in the operation and
growth of our business.
In May, 1999 the shareholders authorized the Board to implement a 1:4
reverse split, but as of December 31, 1999, the Board has taken no action.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Sales to United States Residents
From December 1, 1996 through December 31, 1999, the Company sold or issued
the following securities to persons or entities who are resident in the United
States:
1. In January, 1997, the Company granted an option to purchase 50,000
shares of common stock at an exercise price of $1.50 Canadian per share to a
director. The option expired unexercised.
2. In August, 1997, in connection with the Company's acquisition of
Carbite, Inc., the Company issued an aggregate of 6,263,872 shares of common
stock to the shareholders of Carbite Inc. in exchange for all of the then issued
and outstanding shares of Carbite, Inc.
25
<PAGE>
3. In August, 1997, in connection with the Company's acquisition of
Advanced Golf Systems, Inc. ("Advanced"), the Company issued an aggregate of
700,000 shares of its common stock and warrants to purchase an additional
700,000 shares to the shareholders of Advanced in exchange for all of the then
issued and outstanding shares of Advanced. The warrants expired unexercised.
4. In August, 1997, the Company granted an option to purchase 450,000
shares of common stock at an exercise price of $1.50 Canadian per share to a
director. The option expired unexercised.
5. In September, 1997, in connection with the Company's acquisition of
Carbite, Inc., the Company granted an option to purchase 607,000 shares of
common stock at an exercise price of $.01 Canadian per share to Michael A.
Spacciapolli, the Company's President.
6. In October, 1997, the Company granted options to purchase an aggregate
of 435,000 shares of common stock at an exercise price of $1.00 Canadian per
share to officers, directors and employees and ten consultants of the Company.
7. In December, 1997, the Company granted an option to purchase 7,500
shares of common stock at an exercise price of $.75 Canadian per share to a
consultant to the Company.
8. In February, 1998, the Company granted options to Michael Spacciapolli,
its President, and Chester Shira, its Chairman, to each acquire 87,620 shares of
common stock at an exercise price of $1.00 Canadian per share; reduced the
option granted to a director in August, 1997 from 450,000 shares to 250,000
shares; and reduced the exercise price of all outstanding options as of February
28, 1998 (except for the option to acquire 607,000 shares at $.01 granted to the
Company's President in September, 1997) to $.60 Canadian per share. All exercise
price re-pricings were approved by the Vancouver Stock Exchange.
9. In April, 1998, the Company issued an aggregate of 190,666 shares of
common stock (at a rate of $0.60 Canadian of principal indebtedness per share)
to the following in cancellation of certain indebtedness of the Company to them:
2M Group; Lewis, England & Associates, Inc.; Luce, Forward, Hamilton & Scripps,
LLP; and Shimshon Hasson.
10. In April, 1998, the Company granted options to purchase an aggregate
of 162,500 shares of common stock at an exercise price of $.80 Canadian per
share to an officer, employees and one consultant of the Company.
11. In July, 1998, the Company granted an option to purchase 35,000 shares
of common stock at an exercise price of $.85 Canadian to a director; granted an
option to purchase 5,000 shares of common stock at an exercise price of $.85
Canadian to an employee; and issued 67,500 shares to a consultant to the Company
upon the exercise of stock options for an aggregate exercise price of $40,500
Canadian.
26
<PAGE>
12. In August, 1998, the Company issued 107,572 shares of common stock to
James A. Henderson and Susan V. Henderson as Co-Trustees of The Henderson Living
Trust ("Henderson") dated April 3, 1990 in consideration for entering into a
Loan Agreement dated August 14, 1998 whereby Henderson loaned the Company
$500,000 U.S.
13. In November, 1998, the Company granted options to purchase an
aggregate of 559,000 shares of common stock at an exercise price of $.60
Canadian per share to officers, directors, employees and six consultants to the
Company.
14. In December, 1998, the Company granted an option to purchase 100,000
shares of common stock at an exercise price of $.70 Canadian per share to a
consultant to the Company.
15. In January, 1999, the Company issued 678,750 shares of common stock
(at a rate of $0.52 Canadian of principal indebtedness per share) and warrants
to purchase an additional 678,750 shares of common stock to James A. Henderson
and Susan V. Henderson as Co-Trustees of The Henderson Living Trust
("Henderson") in cancellation of certain indebtedness of the Company to
Henderson.
16. In March, 1999, the Company issued 150,000 shares to Michael
Spacciapolli, the Company's President, in exchange for $90,000 Canadian upon
exercise of stock options; granted the Company's President, Michael
Spacciapolli, options to acquire 450,000 shares at an exercise price of $.85
Canadian (280,000 of these options were returned and cancelled by December 31,
1999); granted Michael Spacciapolli options to acquire 247,500 shares at an
exercise price of $.77 Canadian; and granted a consultant to the Company an
option to acquire 2,500 shares at an exercise price of $.77 Canadian.
17. In March, 1999, the Company issued an aggregate of 150,000 shares of
common stock and warrants to purchase an additional 150,000 shares of common
stock in a private placement to four investors for an aggregate purchase price
of $60,000 Canadian.
18. In April, 1999, the Company issued 37,500 shares of common stock to
one investor upon the exercise of stock warrants for an aggregate exercise price
of $15,000 Canadian.
19. In June, 1999, the Company granted an option to purchase 50,000 shares
of common stock at an exercise price of $.70 Canadian per share to a director.
20. On December 31, 1999, the Company granted options to purchase an
aggregate of 180,000 shares of common stock to 15 employees at an exercise price
of $.42 Canadian per share.
21. The Company is obligated, upon regulatory approval by the Vancouver
Stock Exchange, to issue approximately 195,000 shares of common stock to golf
professional Fuzzy Zoeller for his services during the first six months of his
Endorsement Agreement dated August 20, 1999.
27
<PAGE>
For paragraphs 1 and 4 - 20 herein, no underwriters were used with these
transactions, and the registrant relied upon the exemptions provided by Section
4(2) and/or Regulation D of the Securities Act. For paragraphs 2 and 3, the
registrant relied upon the exemption provided by Section 3(a)(10) of the
Securities Act. All references are to Canadian dollars.
28
<PAGE>
Sales to Non-United States Residents
From December 1, 1996 through December 31, 1999, the Company sold or issued
the following securities outside of the United States to persons or entities who
are resident outside the United States:
1. In January, 1997, the Company granted an option to purchase an
aggregate of 450,000 shares of common stock at an exercise price of $1.50
Canadian per share to two officers who reside in Canada.
2. In May, 1997, the Company issued 350,000 shares of common stock to a
Canadian company upon exercise of warrants for an aggregate exercise price of
$402,500 Canadian.
3. In June, 1997, the Company issued 100,000 shares of common stock to an
officer resident in Canada upon exercise of stock options for an aggregate
exercise price of $150,000 Canadian.
4. In August, 1997, the Company issued 150,000 shares of common stock to
a director resident in Canada for services to the Company.
5. In September, 1997, the Company issued 80,000 shares of common stock
to a former director resident in Canada who is now deceased, upon exercise of
stock options for an aggregate exercise price of $48,000 Canadian.
6. In October, 1997, the Company granted options to purchase an aggregate
of 635,00 0 shares of common stock at an exercise price of $1.00 Canadian per
share to four officers and directors resident in Canada.
7. In February, 1998, the Company amended a prior option granted to a
director resident in Canada to increase the options granted from 50,000 shares
at $1.00 Canadian to 100,000 shares at $1.00 Canadian.
8. In April, 1998, the Company sold an aggregate of 1,454,545 shares of
common stock and warrants to purchase an additional 1,454,545 shares of common
stock to six investors resident outside the United States for an aggregate
purchase price of $800,000 Canadian.
9. In April, 1998, the Company issued an aggregate of 168,000 shares of
common stock (at a rate of $0.60 Canadian of principal indebtedness per share)
to the following firms resident in Canada in cancellation of certain
indebtedness of the Company to them: Martyn Element & Associates Corporate &
Project Finance Limited and Alexander, Holburn, Beaudin & Lang.
10. In July, 1998, the Company issued an aggregate of 415,000 shares of
common stock to three officers resident in Canada upon exercise of stock options
for an aggregate exercise price of $249,000 Canadian.
29
<PAGE>
11. In November, 1998, the Company granted options to purchase an
aggregate of 220,000 shares of common stock at an exercise price of $.60
Canadian per share to an officer and a director, both resident in Canada.
12. In February, 1999, the Company issued an aggregate of 1,454,545 shares
of common stock to six investors resident outside the United States upon the
exercise of stock warrants for an aggregate exercise price of $800,000 Canadian.
13. In April, 1999, the Company granted an option to purchase 100,000
shares of common stock at an exercise price of $.70 Canadian per share to an
officer resident in Canada.
14. In April, 1999, the Company issued 100,000 shares of common stock to
an officer resident in Canada upon the exercise of stock options at an aggregate
exercise price of $60,000 Canadian.
15. In July, 1999, the Company granted an option to purchase 20,000 shares
of common stock at an exercise price of $.85 Canadian per share to a consultant
to the Company resident in England.
16. In September, 1999, the Company granted an option to purchase 150,000
shares of common stock at an exercise price of $.70 Canadian per share to a
consultant to the Company resident in Canada.
17. The Company is obligated, upon regulatory approval by the Vancouver
Stock Exchange, to grant to Daiwa Seiko of Japan an option to purchase 300,000
shares of the Company's common stock at an exercise price equal to the closing
price on September 16, 1999.
For paragraphs 1 - 17 under the Non-United States Residents heading, there
were no underwriters used and the registrant relied upon the exemptions provided
by Regulation S and/or Section 4(2) of the Securities Act. All references are
to Canadian dollars.
ITEM 11. DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
common stock, no par value ("Common Stock").
30
<PAGE>
Common Stock
The holders of Common Stock are entitled to one vote for each share on
all matters submitted to a vote of the shareholders and are entitled to receive
such dividends, if any, as may be declared by the Board of Directors from time
to time out of legally available funds. Upon liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share in all
assets of the Company that are legally available for distribution. The holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares are fully paid and nonassessable.
As of December 31 1999, there were 22,426,486 shares of Common Stock
issued and outstanding, held of record by approximately 1,100 persons.
At its Annual General Meeting on May 19, 1999, the shareholders of the
Company authorized the Board of Directors to approve a reverse stock split of
both the authorized and issued share capital of the Company using a ratio of
4:1, such that the authorized shares would be reduced to 12,500,000 from
50,000,000, and the issued shares would be reduced from 22,426,486 to
approximately 5,597,246 shares if and when the reverse stock split is authorized
by the Board of Directors, assuming a 4:1 reverse split. The shareholders also
approved a post-consolidation increase in the authorized capital of the Company
to 50,000,000 common shares. As of September 30, 1999, the Board has not
proceeded with any share consolidation.
Stock Transfer Agent
The Company's transfer agent and registrar is Pacific Corporate Trust
Company, 625 Howe Street, Vancouver, British Columbia, Canada V6C 3B8.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company Act for the Province of British Columbia, Canada, the
jurisdiction for which the Company is incorporated and the Company's Articles
govern the indemnification of directors. Section 128 of the Company Act permits
a company to, with the approval of the court, indemnify a director against all
costs, charges and expenses because of being or having been a director,
including an action brought by the company or corporation if the person acted in
good faith with the best interests of the corporation and, in the case of a
criminal action, had a reasonable ground for believing the conduct was lawful.
31
<PAGE>
The Company has a currently effective directors' and officers'
liability insurance policy.
32
<PAGE>
Consolidated Financial Statements of
CARBITE GOLF INC.
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
AUDITORS' REPORT
To the Directors of Carbite Golf Inc.
We have audited the consolidated balance sheets of Carbite Golf Inc. as at
December 31, 1999 and 1998 and the consolidated statements of operations and
deficit and cash flows for each of the years in the two year period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and 1998 and the results of its operations and its cash flows for each of the
years in the two year period ended December 31, 1999, in accordance with
Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations and cash flows for each of the years
in the two year period ended December 31, 1999 and the shareholders' equity as
at December 31, 1999 and 1998 to the extent summarized in Note 11 to the
consolidated financial statements.
KPMG LLP
Chartered Accountants
Abbotsford, Canada
March 20, 2000
33
<PAGE>
CARBITE GOLF INC.
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 660,669 $ 1,154,678
Accounts receivable 2,368,863 1,304,595
Inventory (Note 3) 2,381,585 1,999,251
Prepaid expenses 285,641 204,029
Future tax assets (Note 8) 148,000 -
-----------------------------------------------------------------------------------------
5,844,758 4,662,553
Capital assets (Note 4) 620,344 385,106
Patents and trademarks, net of accumulated amortization of
$86,333 (1998 - $68,603) 90,992 76,000
Deferred costs, net of accumulated amortization of $732,895
(1998 - $500,783) 254,882 353,766
Goodwill, net of accumulated amortization of $625,481
(1998 - $335,481) 2,222,804 2,512,804
-------------------------------------------------------------------------------------------
$ 9,033,780 $ 7,990,229
-------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank loan $ 191,925 $ -
Accounts payable and accrued liabilities 775,950 615,488
Current portion of long-term debt (Note 5) 14,152 12,960
Income taxes payable (Note 8) 227,872 -
-----------------------------------------------------------------------------------------
1,209,899 628,448
Long-term debt (Note 5) 29,873 44,590
Future tax liability (Note 8) 5,000 -
Shareholders' equity:
Share capital (Note 6) 10,454,721 9,777,421
Deficit (2,665,713) (2,460,230)
-----------------------------------------------------------------------------------------
7,789,008 7,317,191
Commitments (Note 12)
-------------------------------------------------------------------------------------------
$ 9,033,780 $ 7,990,229
-------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
CARBITE GOLF INC.
Consolidated Statements of Operations and Deficit
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Note 2(a)) $18,510,901 $15,766,882
Cost of sales 9,468,562 6,775,240
----------------------------------------------------------------------------------
Gross margin 9,042,339 8,991,642
Operating expenses:
Selling 6,216,698 6,454,481
Research and development 560,616 345,900
General and administrative 1,896,688 1,309,429
Amortization of deferred costs 232,112 227,400
Amortization of goodwill, patents and trademarks 307,730 304,460
Foreign exchange loss 6,992 3,658
--------------------------------------------------------------------------------
9,220,836 8,645,328
----------------------------------------------------------------------------------
Income (loss) from operations (178,497) 346,314
Other income (expenses):
Gain on dissolution of subsidiary (Note 7) 66,673 -
Interest and other 4,941 2,959
Loss on disposal of assets - (57,954)
--------------------------------------------------------------------------------
71,614 (54,995)
----------------------------------------------------------------------------------
Income (loss) before income taxes (106,883) 291,319
Income tax provision (Note 8):
Current 241,600 52,800
Deferred (143,000) -
--------------------------------------------------------------------------------
98,600 52,800
----------------------------------------------------------------------------------
Net income (loss) (205,483) 238,519
Deficit, beginning of year (2,460,230) (2,698,749)
----------------------------------------------------------------------------------
Deficit, end of year $(2,665,713) $(2,460,230)
----------------------------------------------------------------------------------
Earnings (loss) per share (Note 10) $(0.01) $0.01
----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
35
<PAGE>
CARBITE GOLf INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operations:
Net income (loss) $ (205,483) $ 238,519
Add (deduct):
Items not affecting working capital:
Depreciation 165,752 98,979
Deferred income tax (143,000) -
Equity in loss (earnings) of Carbite Inc. - -
Amortization 539,842 531,860
Gain on dissolution of subsidiary (66,673) -
Loss on disposal of capital assets - 57,954
Net changes in non-cash working capital balances
relating to operations:
Accounts receivable (1,088,887) (773,684)
Inventory (382,334) 72,416
Prepaid expenses (82,003) (61,033)
Accounts payable and accrued liabilities 252,145 (154,032)
Income taxes payable 227,872 -
------------------------------------------------------------------------------------
(782,769) 10,979
Investments:
Deferred costs incurred (133,228) (80,900)
Patent and trademark costs incurred (32,722) (66,479)
Purchase of capital assets (400,990) (256,467)
Proceeds on disposal of capital assets - 19,837
------------------------------------------------------------------------------------
(566,940) (384,009)
Financing:
Issuance of common shares, net share of subscriptions 677,300 842,047
Proceeds on convertible debenture - 500,000
Repayment of convertible debenture - (250,000)
Proceeds on long-term debt - 60,000
Repayments on long-term debt (13,525) (2,450)
Decrease in lease obligation - (6,857)
Increase (decrease) in bank loan (net) 191,925 (18,846)
------------------------------------------------------------------------------------
855,700 1,123,894
--------------------------------------------------------------------------------------
Increase (decrease) in cash during the year (494,009) 750,864
Cash and cash equivalents, beginning of year 1,154,678 403,814
--------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 660,669 $1,154,678
--------------------------------------------------------------------------------------
Supplementary cash flow information:
Interest paid $ 25,562 $ 44,226
Income taxes paid 53,600 9,223
------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
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 which represents a single operating segment. Prior to
June 1998, the Company also operated a printing business. Information with
respect to the results of each of these operations for the year ended
December 31, 1998 is set out in Note 7. The Company's operations are located
in San Diego, California, U.S.A.
2. Significant accounting policies:
(a) Basis of presentation:
The consolidated financial statements are prepared in accordance
Canadian generally accepted accounting principles which conform in all
material respects with accounting principles generally accepted in the
United States, except as disclosed in Note 11.
The consolidated financial statements include the accounts of the
Company and the following subsidiaries:
----------------------------------------------------------------------
Subsidiary Percentage ownership
----------------------------------------------------------------------
Carbite, Inc. 100%
AGS Acquisition Corp. 100%
Printer Graphics Inc. 90%
----------------------------------------------------------------------
All material intercorporate transactions and balances have been
eliminated upon consolidation.
In 1999, Printer Graphics Inc. was formally dissolved (Note 7).
During the year ended December 31, 1997 the following transactions
occurred:
(i) On August 29, 1997, the Company acquired 90% of the outstanding
shares of Printer Graphics Inc. for $7,615.
(ii) On September 3, 1997 the Company's newly incorporated, wholly-
owned subsidiary, AGS Acquisition Corp., acquired 100% of the
outstanding shares of Advanced Golf Systems Inc. in exchange for
700,000 shares of the Company and 700,000 share purchase warrants,
for a total deemed purchase price of $362,460. Immediately
following the acquisition, Advanced Golf Systems Inc. was merged
into AGS Acquisition Corp.
37
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(a) Basis of presentation (continued):
(iii) On September 3, 1997, the Company's newly incorporated, wholly-
owned subsidiary, Carbite Acquisition Corp., acquired the
remaining 50.5% of the outstanding shares of Carbite, Inc. in
exchange for 7,078,872 shares of the Company and 912,524 share
purchase warrants, for a total deemed purchase price of
$3,665,435. As part of the purchase, the Company also issued
607,000 share options to a director, who previously held 607,000
options of Carbite, Inc. Immediately following the acquisition,
Carbite, Inc. was merged into Carbite Acquisition Corp. In fiscal
1999, Carbite Acquisition Corp. changed its name to Carbite Inc.
These transactions have been accounted for using the purchase method
with the results of operations of the acquired subsidiaries included in
the financial statements from the dates of acquisition. Aggregate
acquisition costs of $3,260,256 were allocated as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Printer Graphics Advanced Golf Carbite,
Inc. Systems Inc. Inc.
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets acquired:
Non-cash current assets $ 75,399 $ 15,000 $3,112,748
Capital assets 45,038 - 245,135
Investment in joint venture - 944,077 -
Goodwill 12,325 (589,138) 2,974,384
Deferred costs - - 148,647
----------------------------------------------------------------------------------
132,762 369,939 6,480,914
Liabilities assumed:
Current liabilities 98,913 9,036 902,367
Non-current liabilities 47,303 - 1,004,005
50% Existing equity ownership - - 1,661,735
----------------------------------------------------------------------------------
146,216 9,036 3,568,107
-------------------------------------------------------------------------------------
Net non-cash assets acquired $(13,454) $ 360,903 $2,912,807
-------------------------------------------------------------------------------------
</TABLE>
Advanced Golf Systems Inc. held a 49% interest in the Viper Bite joint
venture with Carbite Inc., which held the other 51% interest. This
joint venture was effectively terminated upon the completion of these
acquisitions.
The consolidated statement of operations for 1997 reflect only the
post acquisition earnings of Carbite, Inc.
(b) Cash and cash equivalents:
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity date of three months or less.
(c) Inventory:
Inventory is valued at the lower of cost and net realizable value.
38
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(d) Investment in Carbite, Inc.:
From March 15, 1996 up to the completion of the acquisition of Carbite,
Inc. (Note 2(a)), the Company's 49.5% investment in Carbite, Inc. was
accounted for using the equity method. This interest was acquired
through the closing of various agreements originally entered into in
September 1994. The first such closing occurred in January 1995. Prior
to January 1995, the Company did not hold any interest in Carbite, Inc.
Under the equity method, the original cost of the shares was adjusted
for the Company's share of post-acquisition earnings or losses less
dividends. The excess of the cost of the shares of Carbite, Inc. over
the net book values of the net assets on the date of acquisition
amounted to $538,481. This excess related to the goodwill and certain
intangible assets of Carbite, Inc. and was being amortized on a
straight-line basis over ten years. Upon the completion of the
acquisition, the unamortized balance was added to goodwill.
(e) Deferred costs:
Deferred costs are related to the development and promotion of the
products of Carbite, Inc. The costs are being amortized on a straight-
line basis over a maximum five year period, depending on the nature of
the costs.
(f) Capital assets:
Capital assets are stated at cost. Depreciation is provided over the
estimated useful lives of the assets.
(g) Goodwill:
Goodwill, representing the excess of cost over net assets of
subsidiaries acquired and certain intangible assets purchased, is
amortized using the straight-line method over ten years. The Company
assesses the continuing value of goodwill each year by considering
current operating results, trends, and prospects and measures
impairment when the estimated undiscounted future cash flows exceed the
carrying value of the asset. In the year of an impairment in value, the
goodwill will be reduced by a charge to earnings equal to this excess.
(h) Patents and trademarks:
Patents and trademarks represent all costs incurred to obtain these
intangible assets. The patents and trademarks are amortized using the
straight-line method over ten years. The Company assesses the
continuing value of patents and trademarks each year by considering
operating results, trends, and prospects and measures impairment when
the estimated undiscounted future cash flows exceed the carrying value
of the asset. In the year of an impairment in value, the patents will
be reduced by a charge to earnings equal to this excess.
39
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(i) Foreign currency translation:
The Company has adopted the United States dollar as its reporting
currency, which is also its functional currency. The Company and its
subsidiaries are considered to be integrated operations and the
accounts are translated using the temporal method. Under this method,
monetary assets and liabilities are translated at the rates of exchange
in effect at the balance sheet date; non-monetary assets at historical
rates and revenue and expense items at the average rates for the period
other than depreciation and amortization which are translated at the
same rates of exchange as the related assets. The net effect of the
foreign currency translation is included in current operations.
(j) Revenue recognition:
Revenue is recognized on shipment of finished goods which is when title
passes. Accordingly, the Company sells products FOB shipping point.
Upon shipment the Company does not have significant remaining
obligations related to products sold.
(k) Income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under this method, future tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Future tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Use of estimates:
These financial statements have been prepared in accordance with
Canadian generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Inventory:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,737,788 $ 936,237
Finished goods 643,797 1,063,014
--------------------------------------------------------------------------
$2,381,585 $1,999,251
--------------------------------------------------------------------------
</TABLE>
40
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
4. Capital assets:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Office and computer equipment $ 364,047 $ 151,523
Manufacturing equipment 609,348 432,93
Automotive equipment 6,785 6,785
Leasehold improvements 32,484 20,430
--------------------------------------------------------------------------
1,012,664 611,674
Less: accumulated depreciation 392,320 226,568
--------------------------------------------------------------------------
$ 620,344 $ 385,106
--------------------------------------------------------------------------
</TABLE>
5. Long-term debt:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Bank loan, payable in monthly instalments of $1,501
including interest at bank prime rate plus 1.75%
per annum, due November 2002 $ 44,025 $ 57,550
Less: current portion 14,152 12,960
--------------------------------------------------------------------------
$ 29,873 $ 44,590
--------------------------------------------------------------------------
Principal repayments for the next three years are as follows:
--------------------------------------------------------------------------
2000 $ 14,152
2001 15,673
2002 14,200
--------------------------------------------------------------------------
</TABLE>
The Company has also secured an operating line of credit of $1,000,000. The
operating line of credit bears interest at bank prime rate plus 1% per annum.
The above bank loan and operating line of credit, are secured by assignment of
inventories, accounts receivable, equipment and assignment of insurance
proceeds.
41
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
6. 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, 1997 17,577,408 $ 8,685,374
Escrow shares cancelled (Note 6(a)) (125,000) -
Issued in 1998:
For cash (net of financing costs of $92,770) 2,044,617 691,537
For settlement of debt 358,666 150,510
For conversion of debenture 678,750 250,000
----------------------------------------------------------------------------
Balance, December 31, 1998 20,534,441 9,777,421
Issued in 1999:
For cash (net of offering costs of $6,265) 1,892,045 677,300
----------------------------------------------------------------------------
Balance, December 31, 1999 22,426,486 $10,454,721
----------------------------------------------------------------------------
</TABLE>
(a) Escrow shares:
As at December 31, 1997, 125,000 of the issued shares were held subject
to an escrow agreement. The approval of the regulatory authorities was
required for the transfer or release of these shares. In fiscal 1998,
these shares were cancelled for nil proceeds.
(b) Share options:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Options
Number exercisable at Price range
of options end of year (CAD $'s)
----------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1997 2,359,500 2,359,500 $0.87
Granted 1,071,500 0.60 to $0.80
Exercised (482,500) $0.60
Cancelled/expired $0.60
Balance, December 31, 2,411,240 $0.47
Granted 0.70 to $0.90
Granted 180,000 $0.42
Exercised (250,000) $0.60
Cancelled/expired (517,000) 0.60 to $0.85
----------------------------------------------------------------------------
Balance, December 31, 1999 2,944,240 2,944,240 $0.54
----------------------------------------------------------------------------
</TABLE>
42
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
6. Share capital (continued):
(b) Share options (continued):
At the annual general meeting of May 29, 1998, the shareholders
approved the repricing of all outstanding share options, primarily from
CAD $1.00 per share to CAD $0.60 per share.
The following share options were outstanding at December 31, 1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Number Exercise
of shares price Expiry date
-------------------------------------------------------------
(CAD $)
<S> <C> <C> <C>
Employees 153,000 0.80 April 14, 2000
Employee 150,000 0.70 September 15, 2000
Directors 179,240 0.60 October 1, 2002
Employees 118,500 0.60 October 1, 2002
Employees 7,500 0.60 December 9, 2002
Director 607,000 0.01 March 1, 2003
Directors 220,000 0.60 March 3, 2003
Employees 559,000 0.60 March 3, 2003
Employee 100,000 0.70 December 19, 2003
Employee 2,500 0.77 March 23, 2004
Director 247,500 0.77 March 23, 2004
Director 270,000 0.85 March 26, 2004
Employee 100,000 0.90 April 19, 2004
Employee 50,000 0.70 June 25, 2004
Employees 180,000 0.42 December 31, 2004
-------------------------------------------------------------
2,944,240
-------------------------------------------------------------
</TABLE>
No compensation resulted from the granting of these options as the
options were granted having exercise prices based on the market value
of the Company's common shares at the date of grant.
(c) Share purchase warrants:
The following share purchase warrants were outstanding at December 31,
1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Number Exercise
of shares price Expiry date
-------------------------------------------------------------
(CAD $)
<S> <C> <C> <C>
Warrants 678,750 0.52 November 30, 2000
Warrants 112,500 0.40 January 25, 2000
0.52 January 25, 2001
-------------------------------------------------------------
791,250
-------------------------------------------------------------
</TABLE>
43
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
7. Segmented information:
As indicated in Note 1, prior to the operations in June 1998, the Company
was active in operating two segments. Summarized financial information for
the year ended December 31, 1998 for these segments is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Golf clubs Printing Total
---------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $15,638,390 $128,492 $15,766,882
Cost of sales 6,679,384 95,856 6,775,240
---------------------------------------------------------------------
8,959,006 32,636 8,991,642
Operating expenses 8,560,667 84,661 8,645,328
---------------------------------------------------------------------
Income (loss) from operations $ 398,339 $(52,025) $ 346,314
---------------------------------------------------------------------
</TABLE>
In June 1998 the Company ceased its printing operations.
In fiscal 1999, the Company formally dissolved its subsidiary, Printer
Graphics Inc., resulting in a gain on dissolution of $66,673 for accounting
purposes.
Revenue and long-lived assets relating to foreign and domestic operations
based on the location of the customer are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
<S> <C> <C>
Net sales:
United States $16,285,551 $14,542,745
Japan 1,906,830 1,212,833
Other 318,520 11,304
---------------------------------------------------------------------
$18,510,901 $15,766,882
---------------------------------------------------------------------
Long-lived assets:
United States $ 818,532 $ 489,699
Taiwan 194,132 121,975
---------------------------------------------------------------------
$ 1,012,664 $ 611,674
---------------------------------------------------------------------
</TABLE>
Major customers, representing 10% or more of the total sales, were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
<S> <C> <C>
Japan $ 1,906,000 $ -
---------------------------------------------------------------------
</TABLE>
44
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
8. Income taxes:
The Company's provision (recovery) for income taxes differs from the amounts
computed by applying the combined U.S. federal and state income tax rate of
43% for the following reasons:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
<S> <C> <C>
Income tax provision (recovery) at the
statutory rate $(45,960) $ 125,267
Increase (decrease) in valuation allowance
for net future tax assets 92,526 (219,801)
Adjustment for printing operation and loss
on disposal of assets (28,669) 47,291
Amortization of non-deductible goodwill 124,700 124,700
Non-deductible expenses and other (43,997) (24,657)
---------------------------------------------------------------------
Actual tax provision $ 98,600 $ 52,800
---------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portion of the future tax assets and future tax liabilities at December 31,
1999 and 1998 are presented as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
<S> <C> <C>
Future tax assets:
Non capital loss carry forwards:
Canadian $ 762,110 $ 619,186
U.S. - 58,687
---------------------------------------------------------------------
762,110 677,873
Unclaimed Canadian research and development
expenditures 141,218 132,929
U.S. current future tax assets 148,000 -
---------------------------------------------------------------------
Total gross future tax assets 1,051,328 810,802
Less: valuation allowance (903,328) (810,802)
---------------------------------------------------------------------
Net future tax assets $ 148,000 $ -
---------------------------------------------------------------------
Future tax liability:
Capital assets and patents $ 5,000 $ -
---------------------------------------------------------------------
Net future tax liability $ 5,000 $ -
---------------------------------------------------------------------
</TABLE>
45
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
8. Income taxes (continued):
The Company has losses for tax purposes of approximately CAD $2,558,000
which are available to offset future years' taxable income in Canada
expiring as follows:
<TABLE>
---------------------------------------------------------------------
<S> <C>
2000 CAD $ 113,000
2001 97,000
2002 172,000
2003 475,000
2004 941,000
2005 268,000
2006 492,000
---------------------------------------------------------------------
CAD $2,558,000
---------------------------------------------------------------------
</TABLE>
The Company has unclaimed research and development expenditures of
approximately CAD $474,000 which can be deducted for income tax purposes in
Canada in future years at the Company's discretion.
9. Related party transactions:
The following amounts were charged by directors and officers of the Company:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
<S> <C> <C>
Wages and fees to directors $ - $ 14,231
Management salaries paid to directors post
Carbite, Inc. acquisition (Note 2(a)) 327,500 375,215
Royalties paid to a director post
Carbite, Inc. acquisition (Note 2(a)) 174,367 168,445
Legal fees paid to directors 8,000 -
Consulting fees paid to a company controlled
by a director - -
Wages and fees paid to an officer 117,668 84,537
Interest paid to directors - 3,548
---------------------------------------------------------------------
</TABLE>
These transactions occurred in the normal course of operations and are
measured at the exchange amount, which is the amount of the consideration
established and agreed to by the related parties.
46
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
10. Earnings (loss) per share:
The earnings per share figures are calculated using the weighted average
monthly number of shares outstanding during the respective fiscal years,
which was 22,117,367 in 1999 and 19,074,032 in 1998. The effect of the
exercise of share options and share purchase warrants outstanding is
antidilutive in 1999 and not materially dilutive in 1998.
11. Differences between generally accepted accounting principles in Canada and
the United States:
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP) which
differ in certain respects from those principles and practices that the
Company would have followed had its consolidated financial statements been
prepared in accordance with accounting principles and practices generally
accepted in the United States (U.S. GAAP).
Had the Company followed U.S. GAAP, the deferred cost and goodwill section
of the balance sheet contained within the consolidated financial statements
would have been reported as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
1999 1998
------------------------ -----------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred costs (Note 11(a)) $ 254,882 $ - $ 353,766 $ -
Goodwill (Note 11(d)) 2,222,804 2,585,804 2,512,804 2,923,154
----------------------------------------------------------------------------------
</TABLE>
Had the Company followed U.S. GAAP, the shareholders' equity section of the
balance sheet contained within the consolidated financial statements would
have been reported as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1999 1998
------------------------- -----------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholders' equity:
Share capital $10,454,721 $10,454,721 $ 9,777,421 $ 9,777,421
Additional paid-in
capital (Note 11(d)) - 668,174 - 594,874
Deficit (Note 11(a)) (2,665,713) (3,225,769) (2,460,230) (2,998,520)
-----------------------------------------------------------------------------------
$ 7,789,008 $ 7,897,126 $ 7,317,191 $ 7,373,775
-----------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
11. Differences between generally accepted accounting principles in Canada and
the United States (continued):
Had the Company followed U.S. GAAP, the statement of operations contained
within the consolidated financial statements would have been reported as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C>
Income (loss) from operations under Canadian GAAP $(178,497) $ 346,314
Reversal of amortization of deferred costs (Note 11(a)) 232,112 227,400
Deferred costs incurred (Note 11(a)) (133,228) (80,900)
Repriced options (Note 11(d)) - (121,374)
Compensation expense (Note 11(d)) (73,300) -
Goodwill amortized (Note 11(d)) (47,350) (47,350)
-----------------------------------------------------------------------------------
Income (loss) from operations under U.S. GAAP $(200,263) $ 324,090
-----------------------------------------------------------------------------------
Net income (loss) under Canadian GAAP $(205,483) $ 238,519
Deferred costs incurred (Note 11(a)) (133,228) (80,900)
Amortization of deferred costs (Note 11(a)) 232,112 227,400
Repriced options (Note 11(d)) - (121,374)
Compensation expense (Note 11(d)) (73,300) -
Goodwill amortized (Note 11(d)) (47,350) (47,350)
-----------------------------------------------------------------------------------
Net income (loss) under U.S. GAAP, being
comprehensive income (loss) under U.S. GAAP $(227,249) $ 216,295
-----------------------------------------------------------------------------------
Net income (loss) per share under U.S. GAAP $ (0.01) $ 0.01
-----------------------------------------------------------------------------------
</TABLE>
For all periods presented net income (loss) under U.S. GAAP equals
comprehensive income (loss).
Had the Company followed U.S. GAAP, the statements of cash flows contained
within the consolidated financial statements would have been reported as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in) operating activities under
Canadian GAAP $(782,769) $ 10,979
Deferred costs incurred (Note 11(a)) (133,228) (80,900)
-----------------------------------------------------------------------------------
Cash used in operating activities under U.S. GAAP $(915,997) $ (69,921)
-----------------------------------------------------------------------------------
Cash used in investing activities under Canadian basis $(566,940) $(384,009)
Deferred costs incurred (Note 11(a)) 133,228 80,900
-----------------------------------------------------------------------------------
Cash provided by (used in) investing activities
under U.S. basis $(433,712) $(303,109)
</TABLE>
48
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
11. Differences between generally accepted accounting principles in Canada and
the United States (continued):
(a) Deferred costs:
Under U.S. GAAP, the expenditures that were deferred and amortized
under Canadian GAAP would have been expensed in the year incurred
against operations and accordingly, there would be no amortization of
deferred costs.
(b) Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
of financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133, as
recently amended, is effective for fiscal years beginning after June
15, 2000. To date, the Company has not entered into derivative
instruments. Management believes the adoption of SFAS No. 133 will not
have a material effect on the Company's financial position or results
of operations.
The U.S. Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), on December 3, 1999. SAB 101 provides additional guidance on the
application of existing generally accepted accounting principles to
revenue recognition in financial statements. The Company does not
expect the guidance of SAB 101 to have a material effect on its
financial statements upon adoption.
(c) Impairment in goodwill and other intangibles:
As described in Note 2(g) and (h), the Company will measure impairment
for Canadian GAAP purposes by the excess of carrying values over the
undiscounted estimated future cash flows. For U.S. GAAP purposes, the
impairment calculation is made by reference to discounted future cash
flows.
(d) Compensation expense:
As described in Note 6(a), on May 28, 1998 the shareholders approved
the repricing of existing stock options. For U.S. GAAP purposes, this
results in an additional compensation charge to the extent of the
intrinsic value of these options at that date.
In September 1999, the Company committed to grant 300,000 fully vested
options to Daiwa to act as an exclusive distributor for a five year
term (Note 12(c)). The fair value of the options of $73,300, determined
in accordance with FAS 123, has been recognized as compensation expense
at the contract performance date. The following assumptions were used
to determine the fair value of the options: Risk-free interest rate of
5.5%; dividend yield rate of 0%; price volatility of 67%; and expected
life of options of three years.
49
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
11. Differences between generally accepted accounting principles in Canada and
the United States (continued):
(d) Compensation expense (continued):
Under U.S. GAAP, the estimated fair value of 607,000 fully vested
options issued in exchange for fully vested options as part of the
Carbite Inc. acquisition (Note 2(a)(iii)) would be recorded as
additional cost of the acquisition. The estimated fair value of the
options of $473,500 was recorded as additional goodwill and additional
paid-in capital. The fair value of these options was calculated by the
following assumptions of the options: Risk-free interest rate of 5.5%;
dividend yield rate of 0%; price volatility of 67%; and expected life
of options of 5.17 years. This additional goodwill would be amortized
over a period of ten years consistent with that recorded under Canadian
GAAP.
For U.S. GAAP purposes, the Company has elected under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS 123") to continue to apply the intrinsic value
based method of accounting for stock-based compensation to employees
under APB 25, "Accounting for Stock Issued to Employees". Under the
intrinsic value method, stock compensation is the excess, if any, of
the quoted market value of the stock at the date of grant over the
amount the optionee must pay to acquire the stock. No additional
compensation expense was recognized under APB 25 for the years ended
December 31, 1999 and 1998.
The Company follows the disclosure provisions of FAS 123. Had
compensation cost been determined based on fair value at the grant date
for options to employees consistent with the measurement provision of
FAS 123, net income (loss) and earnings (loss) per share would have
been:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) as reported $(116,499) $ 216,295
Additional compensation for fair value to options (116,400) (63,900)
-----------------------------------------------------------------------------------
Pro forma net income (loss) $(232,899) $ 152,395
-----------------------------------------------------------------------------------
Pro forma earnings (loss) per share $ (0.01) $ 0.01
-----------------------------------------------------------------------------------
The following assumptions were used to estimate the fair value of options:
<CAPTION>
-----------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.10% 5.0%
Dividend yield rate 0% 0%
Price volatility 38% 59%
Weighted average expected life of options 1 year 1 year
-----------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
The weighted average fair value of the options granted in 1999 was $0.16
(1998 - $0.07) per option.
12. Commitments:
(a) Royalty agreement:
The Company has a royalty agreement with one of the directors, which
pays a fixed fee per club sold in exchange for the exclusive assignment
of all the patents made by the director. It also pays 1/3 of royalties
received by the Company from competitors using the Company's patented
technology.
(b) Endorsement agreement:
In 1999, the Company signed a six year endorsement agreement, which
gives the Company unlimited worldwide use of the endorser's name and
likeness in promotions for the Company and its products. The endorser
also agrees to publicly use Carbite products while competing at PGA
events, and participate in promotional activities the Company arranges.
As consideration, the Company agrees to pay the endorser the following
amounts, in cash and in shares:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Dollar value
Year Cash of shares
-----------------------------------------------------------------------------------
<S> <C> <C>
2000 $200,000 $100,000
2001 200,000 100,000
2002 275,000 225,000
2003 300,000 250,000
2004 325,000 250,000
-----------------------------------------------------------------------------------
</TABLE>
The contract can be terminated by the Company if certain sales figures
are not met or if the endorser in unable to fulfill his duties. For
accounting purposes, the value of each year's consideration will be
recognized by a charge against income on a straight-line basis.
(c) Trademark license and distribution 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 Unites
States. The term is five years with an option for an additional five-
year term. The Company is obligated to pay a royalty of 6% of the
Company's FOB purchase price on all products sold under the license.
The agreement is subject to termination upon certain events, including
failure to meet certain minimum royalty amounts ($75,000 in Year 1,
$225,000 in Year 2, $250,000 in Year 3, $375,000 in Year 4 and $450,000
in Year 5).
51
<PAGE>
CARBITE GOLF INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
12. Commitments (continued):
(c) Trademark license and distribution agreements (continued):
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 commits the Company to grant to Daiwa an option, exercisable
through August 31, 2002, to buy 300,000 shares of the Company's common
stock at the closing market value of the Company's common shares on
September 16, 1999 of $0.70 per share. The Company must also pay 10% of
Daiwa net sales for advertising and promotion of Daiwa products in the
United States.
13. Fair value of financial instruments:
For certain of the Company's financial instruments including accounts
receivable and accounts payable and accrued liabilities, the carrying
amounts approximate fair value due to the immediate or short-term maturity
of these financial instruments.
The carrying value for long-term debt approximates fair value because the
borrowing rate is similar to the rates currently available to the Company
for loans with similar terms and maturity.
14. Reclassification:
Certain of the prior years' figures have been reclassified to conform to the
presentation adopted in the current year.
52
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
The following Financial Statements of the Company are included in this
Amendment #3 to form 10-SB:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations and Deficit for the years ended
December 31, 1999 and 1998
Consolidated Statements of Changes in Financial Position for the years
ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
b. Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION
--------------------------
*2.1 Agreement and Plan of Merger between Carbite, Inc., Carbite Golf, Inc.
and Carbite Acquisitions Corp. dated June 6, 1996
*2.2 Agreement between Advanced Golf Systems, Inc. and Carbite Golf, Inc.
dated September 24, 1996
*3.1 Amended and Restated Articles of Incorporation and Bylaws of the
Company
*4.1 Specimen Common Stock Certificate
*4.2 Form of Warrant
*10.1 Royalty Agreement between Carbite, Inc. and C. S. Shira dated March 1,
1993
*10.2 Employment Agreement between the Company and Chester S. Shira dated
September 3, 1997
*10.3 Employment Agreement between the Company and Michael A. Spacciapolli
dated September 3, 1997
53
<PAGE>
*10.4 License Agreement between Carbite Golf Company and Taylor Made Golf
dated January 1, 1995 and Amendment dated March 4, 1997
*10.5 License Agreement between Carbite, Inc. and K Z Golf, Inc. dated
October 28, 1998
*10.6 Endorsement Agreement between Carbite Golf, Inc., Carbite, Inc. and
Fuzzy Zoeller Productions, Inc. dated August 20, 1999
*10.7 Agreement and Plan of Merger between Carbite, Inc., Carbite Golf, Inc.
and Carbite Acquisition Corp. dated June 6, 1996
*10.8 Agreement between Advanced Golf Systems, Inc. and Carbite Golf, Inc.
dated September 24, 1996
*10.9 Loan Agreement dated April 13, 1998 between the Company and James A.
and Susan V. Henderson as Co-Trustees of the Henderson Living Trust
*10.10 Lease Agreement dated January 6, 1998 between Carbite, Inc. and Nancy
Ridge Technology Center, LLC relating to the facilities at 6330 Nancy
Ridge Road, San Diego, CA 92121
*10.11 Form of Stock Option Agreement
*10.12 Employee Confidentiality and Invention Agreement
*10.13 Commercial Security Agreement between Carbite, Inc. and Scripps Bank
dated May 15, 1999
*10.14 Trademark License Agreement between Carbite Golf, Inc. and Daiwa
Seiko, Inc. dated September 16, 1999
*10.15 Exclusive Distribution Agreement between Carbite Golf, Inc. and Daiwa
Seiko, Inc. dated September 16, 1999
*10.16 Lease Agreement between Manufacturers Life Insurance and Carbite, Inc.
dated October 29, 1999 relating to facilities at 9985 Huennekens
Street, San Diego, CA 92121
*13. Form F-X Appointment of Agent for Service of Process and Undertaking
**27. Financial Data Summary
*Previously filed and incorporated herein by reference
**Filed herewith
54
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARBITE GOLF, INC.
Date: December 19, 2000 By: /s/ John R. Pierandozzi
-----------------------
John R. Pierandozzi
Chief Executive Officer
55
