U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under
the Securities Exchange Act of 1934
For Quarter Ended: June 30, 2002
Commission File No. 0-25743
FREEDOM GOLF CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
91-1950699
(IRS Employer Identification No.)
7308 S. Spruce Street
Englewood, Colorado 80112
-------------------------
(Address of principal executive offices)
80112
(Zip Code)
(303) 221-0331
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: Yes
__X__ No ____.
The number of shares of the registrant's only class of common stock issued and
outstanding as of August 16, 2002, was 13,971,542 shares.
PART I
ITEM 1. FINANCIAL STATEMENTS.
Our unaudited financial statements for the nine months ended June 30, 2002,
are attached hereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward looking statements.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the nine month periods ended June
30, 2002 and 2001.
Total revenues decreased from $124,763 in the nine month period ended June
30, 2001, to $13,886 in 2002, a decrease of $110,877 (88.9%). We believe that
this decrease was attributable to the fact that we have not completed our
infomercial for our Freedom 345 golf club. We had put the completion of the
infomercial on hold until the prospective merger between our company and Trinity
Golf, Inc. ("Trinity"), was either completed or abandoned. Until this occurred,
we put all marketing efforts on hold, principally because we had ceased fund
raising activities and had no available capital with which to undertake such
marketing activities. As of the date of this Report, the proposed merger with
Trinity has been abandoned as a result of our being notified by the Securities
and Exchange Commission that the Securities and Exchange Commission intended to
recommend that a civil action be commenced against us and Gaylen Johnson,
individually, our President. The
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SEC is alleging that both we and Mr. Johnson have violated the anti-fraud
provisions included under the Securities Act of 1933, as amended. See "Part II,
Item 1, Legal Proceedings" below. As a direct result of this pending matter,
management of Trinity has notified us that they do not wish to proceed with the
proposed merger. See "Liquidity and Capital Resources" below for a discussion of
what we intend to do in the future as a result of the termination of the
proposed Trinity merger.
Costs of sales were $7,271 during the nine month period ended June 30,
2002, compared to $21,683 during the similar period in 2001, a decrease of
$14,412 (66.7%). This was due primarily to the decrease in marketing efforts as
described above.
Selling, general and administrative expenses were $171,116 during the nine
month period ended June 30, 2002, compared to $524,341 during the similar period
in 2001, a decrease of $353,225 (67.4%). This decrease was due primarily to a
decrease in advertising and promotion expense, payroll expense and rent, but was
offset by our incurring increased legal fees relating to the proposed merger
with Trinity, which fees were generated primarily in the last calendar quarter
of 2001. Our management has attempted to limit our administrative expenses due
to our severe lack of working capital by moving our operations to the home of
Mr. Johnson and otherwise curtail spending.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had $983 in cash. We had approximately $177,689 in
inventory and $308 in accounts receivable. Our accounts receivable decreased
from the six month period ended March 31, 2002 as a result of the return of our
inventory which we had shipped to Trinity in contemplation of completing the
merger. Other than approximately $16,000 in additional golf club parts, we have
no other material assets, other than our intellectual properties.
At June 30, 2002, we had outstanding notes payable to nonaffiliates in the
principal amount of $364,188. All of these notes are due within one year and
bear interest at from 7.25% to 15% per annum. We have accounts payable due in
the amount of $356,481. In addition, there is an aggregate principal balance of
$165,679 due to Mr. Johnson, our President and John Arney a former officer and
director who resigned his positions with our Company in June 2002. These
obligations include the following:
On December 21, 1999, Heritage Real Estate Development Corp. Defined
Benefit Pension Plan and Trust (the "Heritage Trust") loaned us the principal
sum of $45,200. The Heritage Trust is a pension plan to which John Arney,
Secretary and a director of our company, is trustee and beneficiary. This loan
accrued interest at the rate of 15% per annum and was due December 21, 2000. The
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applicable loan provided for a conversion feature, wherein the loan was
convertible into shares of our common stock at a conversion price of $1.20 per
share.
On October 16, 2000, we renegotiated the terms of this loan. As a result,
the Heritage Trust currently holds two separate notes. One note is in the
principal amount of $40,000, which is secured by 25 complete regulation sets of
graphite Freedom golf clubs including logo head covers and is personally
guaranteed by our President, Gaylen Johnson. This note was due March 6, 2001 and
accrues interest at the rate of 15% per annum, except in the event of a default,
when the interest rate increases to 18% per annum. Relevant thereto, a revised
note was written to show an interest increase to 18% per annum and a new due
date of September 15, 2001. As additional consideration for the renegotiated
loan, during the period ended December 31, 2000, we issued a stock option in
favor of Heritage Trust whereby it has the option to purchase 266,667 shares of
our common stock at an exercise price of $.15 per share through December 3,
2003.
The second note related to this refinancing is in the amount of $10,850
which is the balance of the principal and interest amount due under the original
$45,200 note. $40,000 of the original note of $45,200 was repaid to Heritage
Trust in November 2000, leaving a balance due of $10,850, including $5,200 in
principal, plus $5,650 in interest. This note also accrues interest at the rate
of 15% per annum, with a default interest rate of 18% per annum. This note is
not secured but is guaranteed by our President, Gaylen Johnson. This note was
due February 15, 2001, was revised and extended to September 15, 2001.
Additionally, on December 17, 1999, Heritage Trust loaned us the principal
amount of $20,000, which accrued interest at the rate of 10% per annum with a
default interest rate of 18% per annum. This note was due January 17, 2000. On
June 1, 2001, this loan was renegotiated and a new note issued in the principal
amount of $22,916, representing the original principal amount of $20,000, plus
interest to June 1, 2001 at the rate of 10% per annum. The June 1, 2001 note
bears interest at the rate of 15% per annum and had a maturity date of September
15, 2001. As additional consideration for the renegotiated loan, during the
period ended December 31, 2000, we issued a stock option in favor of Heritage
Trust whereby it has the option to purchase 152,773 shares of our common stock
at an exercise price of $.15 per share through December 3, 2003.
No formal extension of the aforesaid notes has been executed as of the date
of this Report. However, we have reached a verbal agreement with Mr. Arney,
wherein he has agreed to extend both notes under the same terms and conditions
as existed prior to the maturity date of each note until September 30, 2002.
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In addition, our President, Gaylen Johnson, individually, has three
personal loans to us. One note is for $5,500 dated October 29, 1998, one for
$10,000 dated August 9, 1999 and the third in the principal amount of $50,000,
dated September 3, 2000, which Mr. Johnson obtained through his line of credit
with Key Bank. Since September 3, 2000, we have repaid the interest on this loan
directly to Key Bank. In addition, the amount of $17,726 has been deducted from
the principal balances due Mr. Johnson as a result of certain advances made to
him by us. All of these loans accrue interest at the rate of 10% per annum and
Mr. Johnson has agreed to extend these loans until such time as we are in a
position to repay the notes. If we are unable to secure financing, we may not be
able to continue to service the interest payment due Key Bank. As of June 30,
2002, we also have accrued $323,747 in past due salaries due to Mr. Johnson.
In order to successfully implement our business plan, our management
believes that it will be necessary for us to raise additional equity capital of
up to $2 million. We are currently exploring other available funding
opportunities, but as of the date of this Report, no definitive agreement or
arrangement has been reached with any person or entity, who has agreed to
provide funding to us.
We intend to continue our discussions with investment bankers and others to
provide or assist in providing additional financing. However, as of the date of
this Report, we do not have any written commitments for any financing, and no
assurance can be given that we will obtain any such financing. Failure to obtain
additional capital into our company will force management to further reduce
expense, if possible, which may affect our ability to implement our business
plan. If we are not successful, it is doubtful that we will be able to survive
and we will be forced to liquidate.
TRENDS
Because of the difficulty we have been experiencing in raising capital,
implementation of our business plan has been delayed. In spite of this
difficulty, we previously anticipated that our revenues would increase beginning
in February 2001, which increase we believe is reflected in the total revenue
increase which we experienced during the nine month period which ended June 30,
2001. We believe our revenue flow will continue to be inconsistent through 2002,
but we anticipate that our revenues will increase in the summer and fall of
2002, if we are able to secure adequate funding for our operations, complete and
air our 30 minute infomercial for our Freedom 345 golf club, and our products
are accepted by the golfing market. Each of these assumptions are subject to
numerous contingencies and our actual results will likely differ from our
expectations, which differences could be material.
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In addition to the above risks, we also understand that new designs and
changes from traditional lines of golf clubs may meet with consumer rejection.
We have planned our manufacturing capabilities based upon our forecasted demand
for our products. Actual demand for such products may exceed or be less that our
forecasted demand. If we are unable to produce sufficient quantities of our golf
clubs in time to fulfill actual demand, such inability may limit our sales and
adversely affect our financial performance.
INFLATION
Although our operations are influenced by general economic conditions, we
do not believe that inflation had a material affect on our results of operations
during the nine month period ended June 30, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In April 2002, we were advised by the staff at the Miami, Florida office of
the Securities and Exchange Commission that it intended to recommend that a
civil action be commenced against us and Gaylen Johnson, individually, our
President. The SEC is alleging that both we and Mr. Johnson have violated the
anti-fraud provisions included under the Securities Act of 1933, as amended.
These allegations relate to various "A" Warrants which were exercised to
purchase shares of our common stock in 2000. As of the date of this Report, we
are engaged in settlement discussions with the SEC's Miami office, but no
definitive settlement arrangement has been reached and there can be no
assurances that such a settlement will be successfully reached in the immediate
future. Based upon the information currently available to us, it is both our
position and Mr. Johnson's opinion that the allegations are without merit and
would be vigorously defended, if we had sufficient capital available to be able
to pay attorneys to represent us, which we do not. Based upon our conversations
with the SEC, our total exposure in this matter is approximately $170,000, the
amount which we received from the exercise of the aforesaid warrants.
We are unaware of any other threatened or pending matters against us.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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NONE
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
None
(b) Reports on Form 8-K
None
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Freedom Golf Corporation
Balance Sheet
June 30, 2002
(Unaudited)
ASSETS June 30,
------ 2002
-----------
Current assets:
Cash $ 983
Accounts receivable - trade, net of $500 bad debt reserve 308
Other Accounts Receivable --
Inventory 177,689
Deposit --
-----------
Total current assets 178,981
-----------
Property and equipment, at cost, net of
accumulated depreciation of $12,859 4,216
Patents, net of accumulated amortization of $26,115 73,885
-----------
$ 257,081
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable - bank $ 7,196
Notes payable - others 356,992
Notes payable - related party 113,766
Accounts payable - trade 356,481
Advances from officer 52,682
Advances from affiliate
Accrued salaries -officer 323,747
Accrued interest - related party 16,697
Accrued interest 78,592
Accrued expenses 8,797
-----------
Total current liabilities 1,314,950
Stockholders' equity:
Common stock, $.001 par value,
50,000,000 shares authorized,
13,971,542 shares issued and outstanding 13,912
Additional paid-in capital 2,406,802
Unearned services (237,500)
Accumulated deficit (3,241,081)
-----------
(1,057,868)
-----------
$ 257,081
===========
See accompanying notes to unaudited financial statements.
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Freedom Golf Corporation
Statements of Operations
Three Months and Nine Months Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ---------- ----------
Sales, net $ 8,204 $ 17,879 $ 13,886 $ 124,763
Cost of sales 2,672 1,849 7,271 21,683
----------- ----------- ---------- ----------
Gross profit 5,532 16,030 6,615 103,080
Selling, general and administrative expenses 43,305 262,753 171,116 524,341
----------- ----------- ----------- ----------
Income (loss) from operations (37,773) (246,723) (164,501) (421,261)
Other income and (expense):
Interest expense (15,893) (31,106) (46,383) (44,043)
Other income 0 2 6 69
----------- ----------- ----------- ----------
(15,893) (31,104) (46,377) (43,974)
Income (loss) before income taxes (53,666) (277,827) (210,878) (465,235)
Provision for income taxes -- -- -- --
----------- ----------- ----------- ----------
Net income (loss) $ (53,666) $ (277,827) $ (210,878) $ (465,235)
=========== =========== =========== ==========
Basic and fully diluted earnings (loss) per share:
Net income (loss) $ (0.00) $ (0.02) $ (0.02) $ (0.04)
=========== =========== =========== ==========
Weighted average shares outstanding 13,971,542 13,242,021 13,931,542 13,256,611
=========== =========== =========== ==========
See accompanying notes to unaudited financial statements.
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Freedom Golf Corporation
Statements of Cash Flows
Nine Months Ended June 30, 2002 and 2001
(Unaudited)
Nine Months Ended
June 30,
2002 2001
--------- ---------
Net income (loss) $ (53,665) $(465,235)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Common stock issued for services -- --
Depreciation and amortization 1,754 7,497
Interest added to loan balance -- 8,566
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (0) 972
(Increase) decrease in other accounts receivable 57,491 --
(Increase) decrease in inventory (161,728) (74,508)
(Increase) decrease in prepaid expenses -- 38,800
Increase (decrease) in accounts payable 126,219 107,762
Increase (decrease) in accrued salaries 18,000 (13,239)
Increase (decrease) in accrued expenses 13,747 28,216
--------- ---------
Total adjustments 55,482 104,066
--------- ---------
Net cash provided by
operating activities 1,817 (361,169)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (1,447) (749)
--------- ---------
Net cash (used in)
investing activities (1,447) (749)
Cash flows from financing activities:
Common stock sold for cash (5,501) 117,623
Repayment of bank loan (1,403) (4,103)
Proceeds from notes payable 386 232,801
Repayment of notes payable 3,054 --
--------- ---------
Net cash (used in)
financing activities (3,464) 346,321
--------- ---------
Increase (decrease) in cash (3,094) (15,597)
Cash and cash equivalents,
beginning of period 4,077 15,597
--------- ---------
Cash and cash equivalents,
end of period $ 983 $ --
========= =========
See accompanying notes to unaudited financial statements.
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Freedom Golf Corporation
Notes to Unaudited Financial Statements
June 30, 2002
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the provisions of Regulation SB. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. These financial statements should be
read in conjunction with information provided in the Company's report on Form
10-K for the year ended September 30, 2001.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
Income (loss) per share was computed using the weighted average number of common
shares outstanding.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FREEDOM GOLF CORPORATION
(Registrant)
Dated: August 16, 2002
By:s/ Gaylen P. Johnson
-------------------------------------
Gaylen P. Johnson, President
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