**As filedwith the Securities and Exchange Commission on March 1, 2004**

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-KSB**

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**(MarkOne)**

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**ý  ANNUAL REPORT UNDER SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934**

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**For thefiscal year ended November 30, 2003**

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**OR**

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**o  TRANSITION REPORT UNDER SECTION 13 OR 15(d)of theSECURITIES EXCHANGE ACT OF 1934**

** **

**For theTransition Period from          to        **

**CommissionFile No. 001-31919**

 

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**Natural Golf Corporation**

(Name of small businessissuer in its charter)

 

| **Illinois**                                                                                                                | **36-3745860**                           |
|-----------------------------------------------------------------------------------------------------------------------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                                                            | (I.R.S. Employer  Identification Number) |
|                                                                                                                        |
| **1200  East Business Center Drive, Suite 400  Mount Prospect, Illinois 60056  (847) 321-4000**                             |
|                                                                                                                        |
| (Address, including zip  code, and telephone number, including area code  of registrant’s principal executive offices) |

 

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**Securities registered under Section12(b) of the Exchange Act:**

 

| **Title of Each Class of Securities to be Registered** |   | **Name of Each Exchange on Which Registered** |
|--------------------------------------------------------|--------|-----------------------------------------------|
| Common Stock, no par  value per share                  |   | American Stock Exchange                       |

 

**Securities registered under Section12(g) of the Securities Exchange Act:**

 

| **Title of Each Class of Securities to be Registered** |   | **Name of Each Exchange on Which Registered** |
|--------------------------------------------------------|--------|-----------------------------------------------|
| None                                                   |   | None                                          |

 

Check whether the issuer filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports).  Yes  ý    No o

 

Check whether the issuer has been subject to suchfiling requirements for the past 90 days. Yes  o    No ý

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10- KSB or any amendment to this Form 10-KSB.  ý

 

Issuer’s revenues for its most recent fiscal year :$9,744,221

 

The aggregate market value of the common stock held bynon-affiliates (assuming, for this purpose, that executive officers, directorsand holders of 10% or more of the common stock are affiliates), computed byreference to the closing price of such stock as of February 23, 2004, was$12,448,335.

 

At February 23, 2004, 5,082,566 shares of theregistrant’s common stock (no par value per share) were outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Part III – Portions of the Proxy Statement for the Annual Meeting ofShareholders to be held on May 10, 2004 are incorporated by reference into PartIII hereof.

 

Transitional Small Business Issuer:  Yes  o  No  ý

 

 

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**NATURAL GOLF CORPORATION**

 

**INDEX**

 
|                | **Page No.** |
|---------------------|--------------|
| **Part  I.**   |         |
|                |         |   |   |   |
|                | Item         | 1. | Description of  Business | 1 |
|                | Item         | 2. | Description of  Property | 15 |
|                | Item         | 3. | Legal Proceedings | 15 |
|                | Item         | 4. | Submission  of Matters to a Vote of Security Holders | 15 |
|                |         |
| **Part II.**        |         |
|                |         |   |   |   |
|                | Item         | 5. | Market  for Common Equity and Related Stockholder Matters | 16 |
|                | Item         | 6. | Management’s  Discussion and Analysis | 18 |
|                | Item         | 7. | Financial  Statements | 28 |
|                | Item         | 8. | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure | 28 |
|                | Item         | 8A. | Controls  and Procedures | 28 |
|                |         |
| **Part  III.** |         |
|                |         |   |   |   |
|                | Item         | 9. | Directors  and Executive Officers of the Registrant | 29 |
|                | Item         | 10. | Executive  Compensation | 29 |
|                | Item         | 11. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters. | 29 |
|                | Item         | 12. | Certain  Relationships and Related Transactions | 29 |
|                | Item         | 13. | Exhibits  and Reports on Form 8-K | 29 |

 

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**PART I**

 

**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

This report contains forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, and Section 27A of theSecurities Act of 1933, that reflect our current expectations about our futureresults, performance, prospects and opportunities. These forward-lookingstatements are subject to significant risks, uncertainties, and other facets,including those identified in “Risk Factors” below, which may cause actualresults to differ materially from those expressed in, or implied by, anyforward-looking statements. The forward-looking statements within this Form10-KSB may be identified by words such as “believes,” “anticipates,” “expects,”“intends,” “may,” “would,” “will” and other similar expressions. However, thesewords are not the exclusive means of identifying these statements. In addition,any statements that refer to expectations, projections or othercharacterizations of future events or circumstances are forward-lookingstatements. Except as expressly required by the federal securities laws, we undertakeno obligation to publicly update or revise any forward-looking statements toreflect events or circumstances occurring subsequent to the filing of this form10-KSB with the SEC or for any other reason. You should carefully review andconsider the various disclosures we make in this report and our other reportsfiled with the SEC that attempt to advise interested parties of the risks,uncertainties and other factors that may affect our business.

 

For further information about these and otherrisks, uncertainties and factors, please review the disclosure included in thisreport under the caption “Risk Factors.”

 

**Item 1.  Description of Business.**

 

**OVERVIEW**

 

We are a golf instruction and equipment companyfocused on delivering a total system for improving the play of golfers of allabilities.  We produce and sellinstructional video tapes explaining our Natural Golf swing system, offer golfschools through a network of instructors certified to teach the Natural Golfsystem, and manufacture and sell golf equipment specifically developed for thegolfer using the Natural Golf swing system.

 

The Natural Golf swing system places the grip in thepalm of the hands, not in the fingers; and extends the arms to create a“single-plane swing”.  This reduces clubhead and body rotation, creating a simpler, easier to learn, more “natural”motion.  The stance is wider, whichtends to minimize the turning of the hips.

 

We market and sell directly to consumers, includingthe new golfer, the high handicapper, the good golfer wanting to improve, theoccasional golfer, the woman golfer and the golfer with bad back orarthritis.  To attract golfers to theNatural Golf system, we market an instructional kit that includesfull-color-instruction book and instructional videotapes on the Natural Golfswing and short game.  The secondedition of this instructional kit, called the Natural Golf Swing System, wasintroduced in December 2002.  Weadvertise these instructional kits primarily through infomercials aired oncable and broadcast outlets, including The Golf Channel, and direct responseprint advertisements placed in national circulation newspapers and magazines,including USA Today, The Wall Street Journal, Golf Magazine and Golf Digest.

 

As a direct marketer, we have developed a database ofNatural Golf instructional kit purchasers as well as other golfers who haveinquired about the Natural Golf swing system and its benefits.  This database provides the foundation forour direct marketing campaigns to promote attendance at one of

 

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approximately 162 Natural Golf instruction schools across the UnitedStates and the purchase of specially designed, custom-fitted Natural Golfclubs.  Our direct marketing effortsinclude the Natural Golfer magazine published six times each year, a full-timetelemarketing staff, the Natural Golf website, e-mail mailings, and automatedcustomer relationship management tools. These cost-effective direct marketing programs attempt to capture all ofthe golf-related spending of Natural Golf customers.

 

We were incorporated on December 28, 1990 as anIllinois corporation.  InApril 1997, Thomas Herskovits, our Chairman, and Andrew Wyant, ourPresident, acquired a controlling interest in us.  As of January 1, 2001, we split our operations into threewholly-owned subsidiaries, of which Natural Golf Corporation is the parentcompany.  These subsidiaries wereestablished and divided based on source of revenue production: Natural GolfProducts for product sales generated from infomercials and other media advertising,the Internet and telemarketing efforts, Natural Golf Field Sales for productsales generated from the field sales group consisting primarily of certifiedinstructors, and Natural Golf Schools for revenue generated from golf schoolsand instruction.  We produce andmanufacture instructional kits, books and videos, golf equipment andaccessories that are in turn sold to our subsidiaries for direct sale to ourcustomers.  During 2002, we changed ourfiscal year end from December 31 to November 30.

 

**INDUSTRY BACKGROUND**

 

Over the past 20 years, the golf industry has enjoyedrapid expansion in the number of golf facilities, the number of rounds played,and the percentage of the United States population that plays golf at leastonce per year.  Recent statistics andtrends on the golf industry have been complied from the National GolfFoundation’s GOLF PARTICIPATION IN THE UNITED STATES -2000 and 2003 EDITIONS, ASTRATEGIC PERSPECTIVE ON THE FUTURE OF GOLF, prepared collaboratively by theNational Golf Foundation and McKinsey & Company (January 30, 1999),and THE SPORTING GOODS MARKET IN 2002, prepared for the National Sporting GoodsAssociation, and are highlighted below:

 

GOLF MARKET-In 2002 there were approximately 26.2million adult golfers in the United States, up from 25.8 million in 2001.  These numbers could be significantly greaterif the industry captured some of the nearly 40 million people who would like totry golf or play more often.

 

GOLF PRODUCTS AND SERVICES-The golf products industryconsists of the instruction, clubs and equipment, and apparel segments.  The clubs and equipment segment has annualrevenues of nearly $3.9 billion, and the apparel segment has annual revenues ofapproximately $800 million.  The golfinstruction segment is very fragmented, with approximately 25,000 PGAprofessionals and over 335 golf schools in the United States.

 

CHANGING DEMOGRAPHICS-The frequency, or rounds played,is expected to grow at nearly twice the rate of participation.  Favorable demographic trends offer encouraginggrowth prospects for the game of golf. With Baby Boomers now entering their 50’s and 60’s, many are expected toretire, pursue their leisure with more enthusiasm, and live longer andhealthier lives.  The National GolfFoundation reports that the annual average rounds played per golfer increasessignificantly as the golfer ages. Golfers in their 50’s generally play approximately twice as much asgolfers in their 30’s.  Golfers age 65and older play approximately three times as many rounds annually as golfers intheir 30’s.  Currently, approximately75% of all golfers are less than 50 years old and nearly 45% of all golfers arebetween the ages of 30 and 49.  As the BabyBoomers reach their prime golfing age, they are expected to account for a 12%increase in the total size of the industry, effectively 65 million rounds overthe next 12 years.  Further, theemergence of the “echo boom” generation, those born between 1977 and 1995,should also increase participation in and spending on golf, as they enter their20s, the age at which most golfers begin to play the sport.

 

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BROADENING MARKET-Golf has become increasinglyattractive to segments of the population that historically have not been wellrepresented among golfers.  Morerecently, the participation of women and minorities in golf has gainedsignificant momentum.  Finally, theso-called “Tiger effect,” based on the enormous popularity of Tiger Woods andexpanded television coverage of major golf events, has resulted in risingequipment unit sales and numbers of rounds played, and a resurgent growth inthe junior golf segment, which the industry must continue to find ways toretain.

 

INCREASED WEALTH AND GREATER ACCESSIBILITY-Otherfactors for the predicted increase in golf rounds include United Statesresidents’ increase in personal wealth and greater accessibility to golffacilities.  In contrast to priordecades when courses served mainly private memberships, today over 70% ofcourses are public courses, where players pay a greens fee for each round.

 

NEW PRODUCT INNOVATION-In recent years, the golfequipment industry has made significant advances in product design andtechnology.  In our opinion, this rapidevolution appears to be accelerating the rate at which golfers are willing topurchase new or additional equipment. While these advances have not necessarily resulted in improved scores,management believes they illustrate the responsiveness of golfers toinnovations that they believe will improve their game.

 

Going forward, we believe that the golf school marketin particular will continue to do well because virtually all golfers have adesire to improve.  Golf schools aregravitating towards resort locations that provide a total vacation package.  Based upon the combination of the predictedgrowth in rounds played along with the golfer’s willingness to spend money,based upon new product innovations and improvement courses, golf appears wellpositioned in the leisure and entertainment category.

 

**GROWTH STRATEGY AND OPPORTUNITY**

 

Our growth strategy and opportunity includes:

 

Acquire new customers.  We intend to focus our marketing efforts onacquiring new customers.  The primaryway we intend to attract new customers is through the sale of instructionalkits through infomercials, magazine and newspaper ads, radio and theInternet.  We continually seek toimprove the efficiency of our customer acquisition programs through moreeffective creative messages and improved media buying.  In fiscal 2004, The Golf Channel agreed toprovide a comprehensive marketing program with Natural Golf that will include anew “reality” television series based on the benefits of Natural Golf, a newinfomercial and significant advertising.  We expect that this will provide significant new exposure that willgreatly increase our new customer penetration.

 

Increase marketing toexisting customers. We plan to pursue an enhanced, multi-faceted direct marketing effortdesigned to leverage our database of customers who have previously purchasedour products.  Our objective is toconvert instructional kit purchasers into purchasers of golf school sessionsand Natural Golf equipment at increasing rates.  Information technology improvements will facilitate these directmarketing initiatives.

 

Continue to enhance ourgolf schools.   GolfMagazine honored our schools as one of the “Top 25 Golf Schools” for 1999-2000and 2001-2002.   Our network of schoolsincludes approximately 63 year-round locations staffed with our trained instructors.  Our instructors act as field sales agents,providing a local, dedicated sales infrastructure to promote our swing system,products and brand.  We plan to extendour certified instructor network and co-sponsor promotions and events at thelocal level.

 

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Test market a Platinumteaching facility.  Weplan to test market a teaching facility with signage, computer analyticaltools, and a total fitting system in a location with a high concentration ofexisting customers.  Our objective is tostaff this facility with full-time Natural Golf employees who are our bestcertified instructors.  Our marketingefforts will focus on attracting customers to this new site.  We believe that this approach will allow usto capture a greater percentage of school revenues and will foster thedevelopment of an individual lesson program that may enhance our revenues.  This site is expected to be more effectivein generating follow-on equipment sales. If the test market facility is successful, we plan to establish up toeight Platinum teaching centers throughout the United States.

 

Continue to expand ourproduct line.  We planto continue to develop new products such as the ST 110 Irons being introducedcurrently and to develop comprehensive programs to sell other golf accessoriessuch as balls, gloves, bags and shoes. We signed a letter of intent with Callaway Golf in December 2003 andexpect to enhance our product offerings with co-branded equipment specificallydesigned for us by this market leader of golf equipment.  We further expect that there will be acredibility benefit with golfers from the association with Callaway Golf.

 

**NATURAL GOLF SYSTEM**

 

We are a golf improvement company.  The Natural Golf system uses a combinationof grip, stance, swing and equipment that is substantially different fromconventional golf systems.

 

Our swing system is similar to the swing of MoeNorman, legendary Canadian golfer and a member of the Canadian Golf Hall ofFame.  He won 54 tournaments in the1960s and 1970s, including seven consecutive Canadian PGA senior championshipsstarting in 1979.  Moe Norman isregarded as one of the best ball strikers ever by the professional golfingcommunity.

 

The Natural Golf swing system places the grip in thepalm of the hands, not in the fingers; and extends the arms to create a“single-plane swing”.  This reduces clubhead and body rotation, creating a simpler, more “natural” motion.  The stance is wider which tends to minimizethe turning of the hips.  InSeptember 1998, we were awarded United States Patent No. 5,803,827 for animproved golf club head and an improved method of swinging the golf club.  This patent expires on January 15,2015.

 

Our swing system has been designed principally toimprove the average golfer’s handicap by improving accuracy, increasingdistance and reducing strain on the body. We believe that our swing system can be used effectively by the newgolfer, the high handicapper, the good golfer wanting to improve, the occasionalgolfer, the woman golfer, and the golfer with bad back or arthritis.  We conducted a survey of approximately 1,000Natural Golfers in 2001 that indicated a handicap reduction of approximately25% to 40% over the course of the first year playing on the Natural Golfsystem.  The handicap reduction wasgreatest for Natural Golfers who attended a one-day school and played withNatural Golf clubs.

 

The Natural Golf system provides the foundation fornearly all of Natural Golf’s revenue in its three key segments: instructionalkits, golf schools and custom-fitted golf clubs.  We believe that we are the only golf company that markets afull-range, one-stop golf improvement system from instructional kits and videosto golf schools and clubs.

 

**PRODUCTS AND SERVICES**

 

Most of our sales are derived from three key segments:

 

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INSTRUCTIONAL PRODUCTS-We produce a wide range ofinstructional products including videotapes, books, practice devices andaccessories.

 

GOLF SCHOOLS-Our golf instructional courses, or “golfschools” as they are referred to in the golf industry, are staffed by certifiedinstructors in approximately 162 major markets, approximately 63 of whichoperate year round.  Golf Magazinehonored our golf schools as one of the “Top 25 Golf Schools” for 1999-2000 and2001-2002.

 

CUSTOM-FITTED GOLF CLUBS-We manufacture custom-fittedgolf clubs specially designed for the Natural Golf system.  Our Beryllium Copper fairway woods wereranked “Best of the Best” by Rankmark, an independent golf equipmentlaboratory, in 2000 and were judged as a “Best Performer” by GolfTestUSATesting Laboratory in 2001.

 

***InstructionalProducts***

 

We introduce customers to the Natural Golf system byadvertising the sale of an introductory instructional package, entitled NaturalGolf Swing System.  The previous editionof this instructional package, discontinued in late 2002, was known as theLifetime of Better Golf (TM).

 

The Natural Golf Swing System instructional packagewas completely updated and redesigned to help our customers teach themselvesthe basics of our swing system.  Thepackage includes the following materials:

 

Natural Golf Swing System Book with over 120full-color photos and computer-modeled illustrations.

 

Natural Golf Setup Video introducing the principles ofthe Natural Golf “single-plane” golf swing and teaching the easy-to-learn setupfundamentals.

 

Natural Golf Swing Video putting the swing in motionusing a computer-generated Natural Golf model to help the buyer learn.

 

Natural Golf Training Grip enabling a person topractice the Natural Golf grip and swing motions along with the video.

 

In addition to the Natural Golf Swing Systeminstructional kit, we have recently produced three new videos for advancedinstruction in the Natural Golf system-Natural Golf Driving for Distance,Natural Golf Faults and Fixes, and Natural Golf Short Game.  Hosted by Natural Golf’s top teachingprofessionals, these instructional videos are intended for the self-learnerinterested in more than the basic teaching fundamentals included in the NaturalGolf Swing System.

 

Other accessories sold by us include golf apparel,balls, gloves, hats, bags and umbrellas.

 

***Golf Schools***

 

While we believe the Natural Golf Swing Systeminstructional package is a highly effective teaching aid, the most effectiveway to master the Natural Golf system is through face-to-face instruction witha Natural Golf certified trained professional. Our customer surveys show that students who attend a one-day NaturalGolf school reduce their handicaps by an average of 39% over 12 months ofNatural Golf

 

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play, compared with a 25% handicap reduction for Natural Golfers whoonly use our instructional videos.  Thesignificant improvement with our schools compares favorably with conventionalgolf schools that are often ineffective at improving students’ scores.

 

We offer one-day schools in approximately 162locations throughout the United States, Mexico and Canada, with additionallocations added according to demand. Our schools are typically held at public courses (privately-owned,municipally-owned, and resort-type courses) where we use a portion of the golfcourse facilities on a per diem basis as the demand for our schools in aparticular location dictate.  Ourschools are taught by one of our approximately 125 certified instructors, whoreceive a fixed fee for teaching a one-day session and are classified asindependent contractors.  They includeapproximately 38 PGA, Ladies PGA and Canadian PGA members.  In order to maintain favorablestudent-teacher ratios at our schools, we selectively add new certifiedinstructors to meet demand.  The PGA hasapproved our instruction for continuing education credit for PGAprofessionals.  We are currentlyadopting a standardized lesson plan that will be implemented in conjunctionwith our new website.  The customersatisfaction rate of adopting schools is over 95% based on post-school surveys.

 

The number of our school locations continues toincrease, expanding our reach.  At thesame time, the number of repeat students is expected to increase as morethree-day school sites and new advanced schools and short game schools becomeavailable.  We plan to custom-marketthese new schools to our existing customer database.

 

We plan to test market a Platinum teaching facility ata golf course location where we have a good concentration of existingcustomers.  We would have continuousaccess to this facility throughout the term of our golf course site useagreement.  Under this type ofarrangement, we would generally be required to pay a monthly use fee to thecourse, plus possibly a negotiated share of our revenue if we have acooperative advertising arrangement between the golf course and us.  We would equip this facility with tents,golf nets, product displays, club fitting equipment and video instructionequipment, and we would have access to putting greens, bunkers and hittingareas.  A Platinum teaching facilitywould also most likely have full time instructors that would be employees ofNatural Golf.  We would run local andregional marketing programs to drive local/regional or vacation/resortdestination customers to this facility. Our operation of these facilities will increase our fixed costs perlocation compared to our current school location cost arrangements and,accordingly, we must be successful in attracting new school customers at thesePlatinum facilities at a reasonable marketing cost so we can absorb the greaterfixed operating costs.

 

If we have a successful test market, we may establishsix to eight Platinum school locations over the 18-month period following ourrecently completed public offering of common stock.  We expect to be able to determine whether we can achieve therequired cash flow and profit returns on these facilities through our testmarket.  Assuming favorable results, weexpect that our cash flows from operations would be sufficient to fund thisexpansion program, or, if we have insufficient operating cash flows, we mayseek alternative capital sources if the return on capital from these facilitiesso justifies.  There can be noassurance, however, that such additional financing will be available oncommercially reasonable terms, or at all. Except for an initial investment of approximately $50,000, we expectthese facilities to be self-supporting operations generating positive cashflow, and we would not expect to add other Platinum facilities unless webelieved they would generate a positive operating cash flow per location.

 

***Natural Golf Clubs***

 

Much of the improvement of the Natural Golf techniqueover the conventional style is based on the unique “Natural Palm Grip”.  Because the golf club is held in thepalm–instead of the fingers–Natural Golfers require a larger, non-tapering gripon their clubs.  Virtually all golfersexperience improvement

 

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using the Natural Golf technique–even with their own golf clubs–butNatural Golf clubs are designed to work with the Natural Golf swing to ensureincreased effectiveness.  Other clubdesign features incorporated into Natural Golf clubs include the longer shaftfor greater club head speed and the adjusted lie-angle to more perfectly alignwith the more-upright, single-plane Natural Golf swing.

 

Although many people have found that they have beenable to use their old golf clubs while playing the Natural Golf system, we havedeveloped a top quality line of custom-fitted clubs that better fit the NaturalGolf swing.  Internal customer surveyshave shown that students using Natural Golf clubs reduce their handicaps by anaverage of 37% over one year of play, compared to a 25% reduction in handicapfor Natural Golfers that continue to use conventional golf clubs.  We own a number of U.S.  design patents on our Natural Golfclubs.  Our head club designer is BobLukasiewicz, the former head of research and development for Ram Golf.

 

Several premium lines of golf clubs are directlymarketed as a means to optimize performance and improve the Natural Golfer’ssingle-plane swing.  We hold a U.S.patent describing an improved club design–larger, non-tapering grip, highcenter of gravity club head, longer shaft and upright lie angle–that forms thefoundation of the Natural Golf swing method. Multi-Match Technology shafts, a proprietary design engineeredexclusively for us, can be custom fit to the Natural Golfer to optimizeconsistency, control and playability. All Natural Golf clubs are designed to conform to United States GolfAssociation (USGA) rules.

 

Our Beryllium Copper fairway woods, with their lowcenter of gravity, larger sweet spot and “roll and bulge” face, have been wellreceived by PGA professionals, Natural Golfers and even by conventionalgolfers, who can order them with a standard grip.  These premium, high-end fairway woods were ranked “Best of theBest” by the Rankmark organization in 2000, rated number one in both distanceand direction out of 31 fairway woods, including the Callaway Steelhead, AdamsTight Lies 2 and Orlimar.

 

The Beryllium Copper fairway woods and other NaturalGolf clubs also performed favorably in an evaluation by GolfTestUSA in2001.  The Beryllium Copper was ratednumber one overall, our Pipeline irons were rated number two overall, and theTour Hammer driver was rated number five overall.  GolfTestUSA rated each of these Natural Golf clubs a “bestperformer”.

 

Our cavity-backed Pipeline 450 irons use leading edge,metallurgy and thin-face technologies to maximize perimeter weighting foroptimal forgiveness and feel.  ThePipeline club head design is the subject of a U.S. design patent (Patent No.D468,787 granted on January 14, 2003) that protects the design element of ourPipeline iron club heads.  We alsomarket P3 Performance irons that incorporate a variable gravity controltechnology.  Both the Pipeline 450 andP3 Performance irons are premium clubs designed to exclusively benefit thesingle-plane Natural Golf swing.  We recentlyintroduced our new ST110 irons, designed to be lighter and easier to hit, whichincorporate our square tracking swing technology.

 

We also market The Thing putter, which was used byPaul Azinger to win the 1992 PGA Tour Championship.  The Thing putter grip was modified in 2001 with a morerectangular design and rounded edges to improve its feel without compromisingalignment or accuracy.  We introduced amilled aluminum Mallet Thing putter with copper inserts that combines the bestfeatures of The Thing putter with state-of-the-art engineering and metallurgytechnology.

 

Other golf equipment recently introduced includes:

 

17-4 bi-metal steel woods, with copper weights;

 

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25” single plane training club;

 

350cc Tour Hammer deep face titanium driver;

 

Belly and broom putter versions of the Mallet Thing;

 

2+, 3+, 4+ and 5+ Beryllium Copper utility woods; and

 

Two new putters with surlyn face inserts.

 

In December 2003, we entered into a non-binding letterof intent with Callaway Golf Company to have them produce for us a premium lineof custom-made golf clubs including irons, drivers, fairway woods andwedges.  These products will beco-branded with the Callaway and Natural Golf brand names and upon finalizingthe agreement will be available to our customers beginning in the third quarterof 2004.  We will continue tomanufacture and market our current line of Natural Golf brand golf clubs.  Callaway’s sale of customized golf clubs tous is subject to the execution of a definitive agreement.

 

We believe that club sales are driven by our certifiedinstructors’ ability to demonstrate to our golf school students the value ofNatural Golf clubs, by outbound direct marketing efforts to a growing customerdatabase, and through promotion of starter sets and demo clubs.  The growth in Natural Golf club sales can bedirectly correlated to increased participation in Natural Golf schools.  Our certified instructors are paid acommission on the sales of Natural Golf products and services that theygenerate.

 

**MARKETING AND SALES**

 

***Overview***

 

Our marketing and sales strategy is focused on fourdistinct elements-marketing and selling direct to the consumer, promoting anentire “system” to improve one’s golf game, aggressive direct marketing topromote instruction and equipment sales, and an independent field sales groupto promote and sell our products.  Thecombination of these approaches differentiates us from competitors in the golfequipment industry and positions us for significant growth.

 

DIRECT TO CONSUMER MARKETING AND SALES -We market andsell direct to the golfing consumer. The majority of other golf equipment manufacturers sell through massmerchandisers, sporting goods chains, independent sporting and golf stores, andgolf pro shops.  The larger golfinstruction schools may market directly to customers, but they generally do notsell an improvement system that can produce additional higher profit sales.

 

SELLING A TOTAL GOLF IMPROVEMENT SYSTEM -We sell atotal, proven system for improving the play of golfers of all abilities.  Golfers looking to improve their game arefirst introduced to Natural Golf through the purchase of a relativelyinexpensive instructional kit.  Webelieve our ability to then offer golf schools through a network of certifiedinstructors and golf equipment specifically developed for the Natural Golferdistinguishes us in the industry.

 

AGGRESSIVE DIRECT MARKETING PROGRAMS TO EXISTINGCUSTOMERS -After acquiring a customer, our strategy is to market the provensuccess of our system and sell additional higher margin products.  These direct marketing programs includetelemarketing, a bi-monthly magazine, our website and e-mail initiatives andother local promotions.  Compared toothers in the industry, we know our customers and develop a more extensiverelationship.

 

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EXTENDED FIELD SALES GROUP -Our independent fieldsales team of certified instructors provide the critical local, face-to-faceselling opportunity.  Instructors havethe opportunity to earn income from providing game improvement instruction andselling products that further improve students’ play.  Although the field sales team is expected to undertake some localmarketing, we use our direct marketing efforts to drive the golfer to thecertified instructor.

 

Subsequent to November 30, 2003, we entered into amarketing agreement to have a television series produced and aired on the GolfChannel featuring the Natural Golf Swing. The television series will be aired in fiscal 2004.  The marketing partner will also be responsiblefor the promotion of the program on television and on the Internet.  We also will receive commercial units foradvertising within the television series. In connection with this agreement, we have also agreed to purchaseinfomercial airing time.  We expect boththe television series and infomercials to generate significant revenues andenhance our credibility and reputation among conventional golfers.  Our guaranteed commitment under thisagreement is approximately $1.2 million and will be payable in fiscal 2004.

 

***CustomerAcquisition***

 

As part of our customer acquisition marketing efforts,we have advertised extensively on The Golf Channel and Fox Sports and have beenrepresented on each of the major professional golf tours (PGA, Senior PGA,Ladies PGA and Canadian PGA), as well as the Buy.Com (previously Nike) andHooters Tours.

 

The principal marketing tool has been a 30-minuteinfomercial that aired on The Golf Channel, Fox Sports, regional sportsstations, and other cable and broadcast outlets.  The initial infomercial, which promoted the Natural Golf systemand the Lifetime of Better Golf instructional kit, featured announcers PatSummerall and PGA Champion Bob Rosburg. This infomercial ran from July 1998 until shortly afterSeptember 11, 2001.  In December2002, we first ran our current infomercial based on the Natural Golf Challengethat is hosted by Pat Summerall and Mike Ditka.  This infomercial highlights a new scientific study that indicatesthat Natural Golf is a more efficient golf swing than the conventional golfswing, features endorsements from celebrities such as Ron Jaworski and RickyWilliams, and promotes our new Natural Golf Swing System instructionalkit.  Certain individuals participatingin the infomercial and in marketing our products receive royalties based onactual sales pursuant to royalty agreements. Generally, these agreements allow us to use celebrities’ names for thepurpose of promoting and selling our products and instructional services duringthe term of the agreement.  Thesecelebrities receive commissions and/or shares of our common stock from us inexchange for their services.

 

In addition to infomercials, starting in lateJune 2000, we developed and aired 30-and 60-second commercials.  The original commercials, based on the tagline “Natural Golf strips the golf swing down to its bare essentials,”attracted golfers to our website.  SinceJune 2000, we have increased traffic on our website and increased ourweb-based revenue from approximately $400,000 in 2000 to $1.4 million in2003.  More recent versions havecontinued to target new audiences and drive web traffic while keeping themessage “fresh.”

 

We also operate a direct response print campaign insuch newspapers as USA TODAY, THE WALL STREET JOURNAL and THE CHICAGO TRIBUNEand have run full-page ads in FORBES, NEWSWEEK and DELTA SKYWAY.  We have also placed advertisements with anumber of golf publications, including GOLF TIPS and GOLF MAGAZINE, to sell ourinstructional package directly to customers.

 

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We previously have been represented by Sandy Lyle onthe European Tour and in selected United States events such as theMasters.  Sandy improved his playsignificantly since switching to Natural Golf.   Subsequentto November 30, 2003, we entered into an endorsement agreement with PGAProfessional, Craig Bowden. Craig utilizes the Natural Golf swing and his golfbag and clothing carry the Natural Golf logo. We also receive exposure from a number of celebrities and prominentbusiness leaders who play, or are learning to play, Natural Golf.

 

We currently have a database of approximately 325,000golfers worldwide including those that have purchased products, made inquiriesabout our swing system, participated in a free video campaign that ran in 2002,signed up for an opt-in web promotion, participated in live demonstrations orattended trade shows.  Of theseapproximately 200,000 have actually purchased our products at least once.  Further, 38 PGA professionals actively playNatural Golf’s system.  This expandingcustomer database, as well as the adoption of the Natural Golf system by moreand more players, continues to build greater visibility and brand recognitionthat will compliment our future marketing efforts and word-of-mouth referrals.

 

Our acquisition of new customers is directly relatedto our marketing programs across the various mass media channels.  The majority of our new customers aregenerated from our infomercial, although new customers from print, radio andInternet sources have shown steady increases. Below is an analysis of all new purchasing customers that we have addedfor the past years.

 
| **Customers**                             |   | **Pre-2000** |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------------------------|--------|--------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                      |   |         |   |     |   |     |   |     |   |     |   |
| New Customers Added                       |   | 61,405       |   | 42,697   |   | 55,543   |   | 27,474   |   | 18,636   |   |
|                                      |   |         |   |     |   |     |   |     |   |     |   |
| Cumulative Customers                      |   | 61,405       |   | 104,102  |   | 159,645  |   | 187,119  |   | 205,755  |   |
|                                      |   |         |   |     |   |     |   |     |   |     |   |
| % Annual Increase in Cumulative Customers |   | —       |   | 69.5     | %      | 53.3     | %      | 17.2     | %      | 10.0     | %      |

 

Due to limited financial resources, we reduced spendingon customer acquisition marketing in 2002 and 2003.  Marketing expenses were $4.9 million, $2.3 million and $2.9million in 2001, 2002 and 2003, respectively. Based on approximately 101,653 new customers added in our primaryproduct categories during the three-year period 2001 to 2003, the averageacquisition marketing cost per new customer was $99.00.  Our net acquisition cost was reduced by thegross margin generated from the first purchase by these customers, generally aninstructional video or DVD.  Ourcustomer acquisition marketing in 2003 was less effective than in the past.

 

***Direct MarketingPrograms***

 

A key component of our strategy is leveraging ourdatabase of Natural Golfers to attend our schools and then selling themequipment.  The primary means to drivethese new follow-on sales include direct marketing, telemarketing, NaturalGolfer magazine, and e-mail and website programs.  As our database grows each year, the effectiveness of the directmarketing initiatives should produce even greater levels of follow-on revenue.

 

After acquiring a new customer, we attempt to sellthem our other products, including golf schools and equipment.  These sales are driven primarily from anextensive direct marketing campaign consisting of direct mailings, magazinedistribution, opt-in e-mails and other special promotions.  Our direct marketing costs were $1.5 millionand $1.2 million for the years ended December 31, 2002 and November 30,2003, respectively.  As a result of ourdirect marketing efforts, our new customers on

 

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average spend approximately $120.00 on other products and servicesduring the 18-month period following their initial purchase.

 

Owners of our instructional kit receive a combinationof direct mail, telemarketing and magazine advertising to drive sales of golfschools and clubs.  Follow-up effortsfocus on our schools, which have proven to be the most effective vehicle forselling equipment.  Over the three-yearperiod 2000 to 2002, approximately 7% of our new instruction kit customersbooked a Natural Golf school within the 18-month period following their initialpurchase, spending approximately $385 per customer   Approximately 15% of our new instruction kit customers purchasedNatural Golf equipment within the 18-month period following their initialpurchase, spending approximately $380 per customer.

 

We use a direct-to-customer marketing effort that includes direct mailand telemarketing.  We currently have anin-house telemarketing staff that generates about 80% of school sales and 50%of club sales.  Three customer servicerepresentatives support the telemarketing team.  In addition, the NATURAL GOLFER magazine is published six times ayear and allows us to communicate directly with our customers.  The magazine currently has a circulation ofover 250,000.  As the circulation grows,we anticipate that the magazine will be able to generate outside advertising revenuesto fund its publication.

 

The Internet has also emerged as a key element of ourdirect marketing and customer relationship management programs.  Our website (www.naturalgolf.com) is a keyvehicle for continuing communications with our customers and a basis for tryingto control all of their golf-related expenditures.  Weekly e-mail programs, such as e-tips, and opt-in programs, suchas school giveaways, online videos and promotion specials, all contribute to agrowing trend in follow-on revenue.  Ourweb-based revenue increased to approximately $1.4 million in 2003  from roughly $400,000 in 2000.

 

An upgraded version of our website, launched inMay 2001, has been fully integrated with our information and accountingsystems.  The current website allowsNatural Golfers to purchase our products, schedule Natural Golf schools and chatwith other Natural Golfers.  Withappropriate funding, we expect to enhance the offerings of the current websiteto include providing Natural Golfers with the functionality to:

 

Schedule Natural Golf lessons;

 

Book tee-times at any one of 500+ courses;

 

Keep handicaps and analyze their games;

 

Book Natural Golf vacations;

 

Receive video lessons from a Natural Golf CertifiedInstructor; and

 

Store their digitized swing to monitor improvementsover time.

 

***FutureOpportunities***

 

A number of strategic marketing initiatives arecurrently being reviewed or pursued on both the customer acquisition and directmarketing fronts.  These include thefollowing:

 

Further market the web-based affiliate program thatwas launched with over 750 e-commerce sites;

 

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Establish a retail program, including display unitsand a certified club fitter program, for pro shops and equipment chains;

 

Develop a comprehensive partnership with the GolfChannel that would include participation in programming, favorable infomercialrates, and cross promotion with TheGolfChannel.com;

 

Explore the benefits of using Golf Digest’s databaseto identify leads;

 

Develop a cooperative arrangement with Golf Magazinefor print, special section and editorial advertising and content;

 

Expand the successfully tested specialty One-DayNatural Golf schools including Short Game, Advanced Game, Signature, PlayingPreparation, as well as corporate schools;

 

Test market a Natural Golf Platinum school site anddevelop strong local marketing programs to support these types of sites;

 

Test the effectiveness of various lesson packages andinstructor compensation programs and expand the lesson-selling program;

 

Introduce an annual membership program;

 

Test market our products recently translated intoJapanese on The Golf Channel Japan;

 

Promote our credit card program which can produceincome and attractive financing options for Natural Golfers; and

 

Target celebrity and professional golfers who arecurrently not in the top portion of the world rankings for their “revival” aspublicity opportunities for us.

 

**BACKLOG**

 

At November  30, 2003, we had approximately$107,000 of backlog of written firm orders for products.  Approximately half of this backlog wasshipped in December and the balance will be shipped when there is adequateinventories.  We require payments forproducts at the time the order is placed.** **Our backlog does not includeunearned school revenue that is collected in advance of the school completion.

 

**COMPETITION**

 

The golf equipment industry is highly competitive anddominated by a few large market participants, including Callaway (which alsoowns the Ben Hogan, Odyssey and Top-Flite brands), Adidas (which owns theTaylor Made and MaxFli brands), Nike, Fortune Brands (which owns the Titleistand Cobra brands) and Ping.  Thesecompanies have better brand recognition and significantly greater financialresources than us.  Newer and smallercompanies have also entered the market, including Rossignol (which owns theCleveland Golf brand), Adams, Wilson, Mizuno, and GenX Sports (which owns TearDrop, Ram and Tommy Armour brands), which has led to increasedcompetition.  Our large competitors tendto promote and market a premium product image focused primarily on performance.  The significant research and development,marketing and sponsorship budgets of these competitors tend to result inpremium priced products compared to smaller players in the equipment industry.  We likewise promote a premium product imagein terms of both performance and price, but with a significantly lower researchand development, marketing and sponsorship budget.

 

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Many of our current and potential competitors havelonger operating histories, established reputations and greater financial,technical and marketing resources than we do. This may place us at a disadvantage in responding to our competitors’pricing strategies, technological advances, advertising campaigns, strategicpartnerships and other initiatives. Many of our competitors have well-established relationships with ourpotential partners and have extensive knowledge of these industries.  These competitors may be able to respondmore quickly to new or emerging technologies and changes in customerrequirements and devote more resources to the development, promotion and saleof their products and services than we can. Finally, we expect to face additional competition from new entrants intothe golf school and golf equipment marketplaces because there are relativelylow barriers to entry into them.

 

**INTELLECTUAL PROPERTY; RESEARCH ANDDEVELOPMENT**

 

We hold a patent related to our single plane swing,which requires significantly less rotation, making the swing less sensitive totiming and coordination.  United StatesPatent #5,803,827, dated September 8, 1998, expires January 17, 2015 andrelates to the integration of a club head design and the Natural Golf swingmethod.  United States Patent #5,803,827was submitted on a pro se basis by the inventor.  Our claim with respect to this patent may beof limited value because our swing method may be practiced using golf clubsthat do not meet the club head design specifications set forth in the patent.  Further, the golf club design claims underthis patent are not currently incorporated into our club designs.   We own this patent exclusively, and nolicensing or royalties are paid by us to third parties for the manufacture andsale of products under this patent.  Weare not aware of any persons infringing on these patents, or any infringementby us on the intellectual property rights of others.  Although we cannot prevent others from using or practicing ourswing method claimed under this patent, we can prevent the commercialization ofour swing method under our Natural Golf trademark, and we have covenants underour certified instructor agreements that restrict the use of our teachingmethods, processes and techniques following termination.

 

We also exclusively own two design patents on club headdesigns.  U.S. Design Patent #388,144,filed November 27, 1996 and issued December 23, 1997, covers the club headdesign of our History Stick sand wedge and expires on December 23, 2011.  U.S. Design Patent #468,787, filed November23, 2001 and issued January 14, 2003, covers the club head design of ourPipeline irons and expires on January 14, 2017.

 

Mr. Robert Lukasiewicz, the primary club designerfor Ram Golf Company for over 20 years, works for us on a consultingbasis.  We recently extended Mr. Lukasiewicz’sconsulting agreement through December 31, 2004.  Mr. Lukasiewicz has agreed that all products and designs createdfor us will be deemed our exclusive property. Our agreement with Mr. Lukasiewicz may be terminated by either of usupon 60 days’ notice. Mr. Lukasiewicz’s involvement has enabled us to producehigh-quality, innovative products at a fraction of the cost of developing themin-house.  We expect to spend additionalamounts to introduce several new products. We spent approximately $78,000 and $104,000 in research and developmentin 2003 and 2002 respectively, primarily for new golf club design and relatedtooling and the development of new instructional videos.

 

We own a registered trademark on “Natural Golf” forequipment and services in the United States and Canada, and for equipment inthe European Union.  We own a registeredtrademark on Natural Golf for services in Japan.  Other registered and/or pending trademarks include “A Lifetime ofBetter Golf”, “Pipeline”, “Pro Performance”, “Single Plane”, “TI Hammer”,“ST110” and “Square Tracking”.  Variouscopyrights are also held on some of our golf instruction videotapes.  We are aware of certain parties that own orhave rights to use the Natural Golf mark in connection with golf instructionservices in parts of Europe, in Australia and in other parts of the world.

 

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**EMPLOYEES**

 

We have assembled a management team led by ourPresident and CEO, Andrew S.  Wyant, andour Chairman, Thomas Herskovits.  We had53 employees as of November 30, 2003, of which 47 were full-timeemployees.  We are able to reduce ourfixed expenses, such as salaries and benefits, by hiring part-time labor forproduction and accounting during the summer, which is our peak salesseason.  Our manufacturing anddistribution activities include the assembly of purchased golf club components,the packaging of golf club sets, and the receiving, warehousing and shipping ofinstruction kits, accessories, books and videos and golf clubs.  Production and duplication of videotapes andinstruction are generally handled on a contract basis.

 

None of our employees are covered by a collectivebargaining agreement, nor have we experienced a strike or other adverse workstoppage due to organized labor.  Weoffer our employees a benefits package that includes an annual bonus program,medical and dental coverage, disability insurance, stock options, and a 401(k)retirement savings program.

 

We also have a national network of approximately 125certified instructors who serve as independent contractors.

 

**RAW MATERIALS**

 

The principal raw materials and components used in themanufacture of our golf clubs and equipment are shafts, heads headcovers andgrips.  We purchase approximately 70% ofour golf equipment inventory from the five major suppliers discussedbelow.  We purchase our graphite andsteel shafts from Apache Golf, Inc. and True Temper Sports, respectively.  We purchase our club heads from threevendors in Asia, Sino Golf Manufacturing, Shanghai Precision Technology andApex Investment Casting.

 

We are not dependent upon any one supplier for rawmaterials or components used in the manufacture of our equipment.  We believe there are adequate alternativesources of raw materials and components of sufficient quantity andquality.  Although we are not dependenton any single-source provider, we may experience a delay in replacing one ormore of our vendors and we may be required to pre-pay for shipments from areplacement vendor.

 

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**Item 2.  Description of Property.**

 

We currently lease a 25,395 square foot facility inMount Prospect, Illinois from First Industrial, L.P. which serves as ourcorporate office and manufacturing, distribution and warehouse facility.  Our lease agreement provides for $11,661 inmonthly base rent plus 23.96% of the property’s operating expenses.  Our monthly base rent payments increased to$12,011 per month in September 2003 for the last year of the lease.  The term of the lease is three yearscommencing December 1, 2001, and may be extended by us for an additionalthree-year term.

 

Effective October 1, 2002, we sublet a portion ofour Mount Prospect, Illinois facility to TEC Construction, LLC.  The monthly rent charged to TECConstruction, LLC is $3,500.  There isno written sub-lease agreement, and both parties may terminate the sub-lease atany time.  Thomas Herskovits is aprincipal owner of TEC Construction, LLC.

 

**Item3.  Legal Proceedings.**

 

There are no pending or, to our knowledge, threatenedclaims against us.  However, from timeto time, we expect to be subject to various legal proceedings, all of which areof an ordinary or routine nature and incidental to our operations.  Such proceedings have not in the past had,and we do not expect they will in the future have, a material impact on ourresults of operations or financial condition.

 

We provide a 30-day, money-back satisfaction guaranteeon most of our products.  Additionally,we provide a limited 2-year warranty against manufacturer defects orworkmanship on our golf equipment.

 

**Item 4. Submission of Matters to aVote of Security Holders.**

 

We did not submit any matters to a vote of theshareholders in the fourth quarter of 2003.

 

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**PART II**

 

**Item 5.  Market for Common Equity and Related Stockholder Matters.**

 

On December 11, 2003, we completed an initial publicoffering of common stock, no par value per share.  These securities were registered under our Registration Statementon Form SB-2 (Reg. No. 333-107802). Gilford Securities Incorporated underwrote the offering.  Under the offering, we registered 2,500,000shares for sale.  All of the commonshares were sold at an initial public offering price of $5.00 per share,resulting in an aggregate gross offering amount of $12.5 million.  We paid underwriting discounts of $1.0million on the offering.  Other offeringexpenses totaled approximately $1.1 million. After deducting offering expenses and underwriting discounts, wereceived approximately $10.4 million of net proceeds from the offerings.  We used approximately 46%  of the net proceeds to satisfy indebtednessand obligations due.  Our management hassignificant flexibility in applying the remaining net proceeds.  Pending these uses, we have invested the netproceeds from the offering in government securities and other short-term,investment-grade, interest-bearing instruments.

 

Upon completion of our initial public offering, ourcommon stock began trading on the American Stock Exchange under the symbol“NAX”.  Our common stock has traded at ahigh of $5.05 and a low of $3.25 between the inception of its trading onDecember 11, 2003 and February 23, 2004.

 

Before our initial public offering, there was noestablished public market for our common stock.

 

As of February 23, 2004, there were 111 shareholdersof record of our common stock, based upon securities position listingsfurnished to us by our transfer agent. We believe the number of beneficial owners is greater than the number ofrecord holders because a large portion of our common stock is held of recordthrough brokerage firms in “street name”.

 

We have not declared or paid any cash dividends on ourcommon stock and do not intend to pay any cash dividends on the common stock inthe foreseeable future.  We currentlyintend to retain future earnings, if any, to fund the development and growth ofour business.  Future dividends, if any,will be determined by our board of directors.

 

Within the past year, we have issued or soldunregistered securities as described in the transactions listed below.  For each transaction, an exemption fromregistration under the Securities Act of 1933 is claimed for the sale ofsecurities in reliance upon the exemption offered by Section 4(2) of theSecurities Act, which exempts transactions by issuers not involving a publicoffering, or pursuant to Regulation D or promulgated thereunder.  The use of this exemption is based on thefollowing facts:

 

Neither we nor any person acting on our behalfsolicited any offer to buy or sell the securities by any form of generalsolicitation or advertising;

 

The purchasers represented in writing that they wereacquiring the securities as a principal for their own account for investmentpurposes only and without a view towards distribution or reselling thesesecurities unless pursuant to an effective registration statement or exemptionfrom registration in compliance with federal or state securities laws;

 

At the time of the purchase, the purchasers wereaccredited investors, as defined in Rule 501(a) under the Securities Act, hadthe opportunity to review applicable disclosure materials and ask questions inregard to us; and

 

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The securities may only be disposed of pursuant to aneffective registration statement or exemption from registration in compliancewith federal or state securities laws and the certificates evidencing thesecurities bear legends to that effect.

 

Except as specifically stated below, no underwriter orsales or placement agent was involved in the transactions described below.

 

In January 2003, we issued 499 shares of commonstock to two note holders in payment of approximately $4,990 of accruedinterest.  The shares of common stockwere issued at a rate of $10.00 per share under the terms of the respectivenotes.  This offering was conductedpursuant to Section 4(2) of the Securities Act.

 

From January 2003 through May 2003, weissued convertible debentures in an aggregate principal amount of $1,305,000 to23 individuals or entities, all of whom were accredited investors, pursuant toa private placement memorandum.  Thedebentures mature December 31, 2003 and bear interest at 10% per annum.  Prior to their maturity, we requested an extensionof the maturity date of these debentures to June 30, 2004.  The debentures were convertible by theelection of the holder at any time prior to maturity into shares of commonstock at $4.00 per share. The debenture holders also received warrants topurchase 326,250 shares of common stock at $4.00 per share. These warrantsexpire December 31, 2007. In connection with the sale of convertible debenturesunder the private placement offering, we paid Keating Securities, LLC, aregistered broker-dealer, commissions of approximately $81,000 throughMay 2003 and issued to Keating Securities, LLC warrants to purchase 20,250shares of our common stock exercisable at $4.00 per share.  Mr. Stephan H. Perraud, a consultantretained by us, also received a finder’s fee of $24,500 in connection with thesale of $245,000 of debentures to eight investors.  Mr. Perraud’s services consisted solely of identifying andreferring potential investors in the offering to us.  Mr. Perraud is not a registered broker-dealer and did notparticipate in substantive discussions with potential investors concerning aninvestment in us.  This offering wasconducted pursuant to Rule 506 of Regulation D under the SecuritiesAct.

 

On February 11, 2003, we issued 96,304 shares ofcommon stock to six individuals or entities in full payment of certain noteswith an aggregate principal balance of $645,000 and accrued interest of$125,432.  The shares of common stockwere issued at a rate of $8.00 per share under the terms of payment under thenotes.  This offering was conductedpursuant to Section 4(2) of the Securities Act.

 

In March 2003, we issued options to purchase 10,000shares of our common stock exercisable at $10.00 per share to an individualthat participated in our infomercial. These options were valued at $18,600 and were issued as compensation forservices rendered in connection with the production of our infomercial.  This offering was conducted pursuant toSection 4(2) of the Securities Act.

 

In March 2003, we issued warrants to purchase 3,125shares of common stock at an exercise price of $0.01 per share to aprofessional golfer, pursuant to an endorsement agreement dated April 1,2001.  These warrants expire September30, 2003.  We valued warrants issued atthe time of issuance at approximately $7,000. This offering was conducted pursuant to Section 4(2) of the SecuritiesAct.

 

In April 2003, we issued 720 shares of commonstock to two note holders in payment of $7,200 of accrued interest.  The shares of common stock were issued at arate of $10.00 per share under

 

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the terms of the respective notes.  This offering was conducted pursuant toSection 4(2) of the Securities Act.

 

On May 1, 2003, we issued 149,520 shares ofcommon stock to an individual in full payment of a note with an aggregateprincipal balance of $500,000 and accrued interest of $98,080.  The common stock was issued at a rate of$4.00 per share pursuant to the terms of the note.  This offering was conducted pursuant to Section 4(2) of theSecurities Act.

 

From June 16, 2003 through November 2003, we issuedunsecured convertible debentures in the principal amount of $1,263,683 tothirty investors or entities, all of whom are non U.S. persons, pursuant toRegulation S under the Securities Act. These debentures mature June 30, 2004 and bear interest at 10% perannum.  The debentures were convertibleby the election of the holder at any time prior to maturity into shares of ourcommon stock at $4.00 per share.  Thesedebenture holders also received warrants to purchase 315,922 shares of commonstock at $4.00 per share.  The warrantsexpire June 2008.  In connection withthe sale of these debentures, we paid Keating Securities, LLC, a registeredbroker-dealer, commissions of approximately $126,368 through November 2003 andissued Keating Securities, LLC warrants to purchase 31,592 shares of our commonstock exercisable at $4.00 per share. This offering was conducted pursuant to Regulation S under theSecurities Act.

 

On June 30, 2003, we issued 623 shares of our commonstock to a note holder in payment of $2,492 of accrued interest.  The shares of common stock were issued at arate of $4.00 per share under the terms of the note.  This offering was conducted pursuant to Section 4(2) of theSecurities Act.

 

During July 2003, we issued warrants to purchase25,750 shares of our common stock to certain secured convertible debentureholders that agreed to extend the maturity date of their debentures fromDecember 31, 2003 to June 30, 2004 and to enter into lock-up agreements.  These warrants are exercisable at $4.00 pershare and expire on December 31, 2007. This exchange offer was conducted pursuant to Section 3(a)(9) ofthe Securities Act.

 

During August 2003, we issued 7,750 shares of ourcommon stock valued at $4.00 per share to a former employee in settlement ofcertain claims for unpaid compensation. These shares were valued at $31,000, which amount represented thenegotiated value of the compensation claims. This offering was conducted pursuant to Section 4(2) of the SecuritiesAct.

 

On December 17, 2003 we issued 60,148 shares of ourcommon stock to note holders in****paymentof $240,592 of accrued interest.  Theshares of common stock were issued at a rate of $4.00****per share under the terms of the applicable notes.  This offering was conducted pursuant to****Section 4(2) of the Securities Act.

 

**Item 6. Management’s Discussion andAnalysis or Plan of Operation.**

 

The following discussion and analysis providesinformation that we believe is relevant to an assessment and understanding ofour results of operation and financial condition. You should read this analysisin conjunction with our audited consolidated financial statements and relatednote. This discussion and analysis contains statements of a forward-lookingnature relating to future events or our future financial performance. Thesestatements are only predictions, and actual events or results may differmaterially. In evaluating such statements, you should carefully consider thevarious factors

 

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identified in this report which could cause actual results to differmaterially from those expressed in, or implied by, any forward-lookingstatements, including those set forth in “Risk Factors” in this Annual Reporton Form 10-KSB.

 

**RECENT initiAL PUBLIC OFFERING SUBSEQUENT TO YEAR-END AND IMPACT ONCOMPANY**

 

On December 17, 2003, we successfully completed aninitial public offering of 2.5 million shares of common stock.  As this public offering was closed after theCompany’s year-end, the financial impact of receiving the net proceeds fromthis significant transaction is not reflected in the financial statementsincluded in this Form 10-KSB. The net proceeds from the stock offering, afterdeducting underwriting fees and offering expenses, were $10.4 million.  The proceeds are being used to pay offoutstanding obligations, develop new infomercials, fund advertising andpromotion campaigns, and implement a total enterprise information and financialsystem.  Due to a lack of adequatecapital during the pastcouple of years, we had to curtail our advertising and marketingactivities.  This was reflected in thedecline in sales from $16 million in fiscal 2001 to $9.7 million in 2003.  Additionally, in order to continueoperations in the past couple of years we needed to utilize certain financialinstruments that were extremely costly and dilutive.   Given the capital infusion from the IPO and its effect on ourability to run our operations, we believe that our past performance is notnecessarily indicative of future operations.

 

**OVERVIEW**

 

We are a golf instruction and equipment companyfocused on delivering a total system for improving the play of golfers of allabilities.  We produce and sellinstructional video tapes explaining our Natural Golf swing system, offer golfschools through a network of instructors certified to teach the Natural Golfsystem, and manufacture and sell golf equipment specifically developed for thegolfer using the Natural Golf swing system. Our operations are split into three direct, wholly-ownedsubsidiaries.  These subsidiaries wereestablished based on source of revenue production:

•       Natural Golf Products Corporation forproduct sales generated from infomercials and other media advertising, theInternet and telemarketing efforts,

•       Natural Golf Field Sales Corporation forproduct sales generated from the field sales group, primarily certifiedinstructors, and

•       Natural Golf Schools Corporation forrevenue generated from golf schools and instruction.

 

Our Natural Golf Products subsidiary markets and sellsall of our products, as well as golf instruction services for our Natural GolfSchools subsidiary operations.  NaturalGolf Products uses various methods to attract golfers to the swing system andpurchase the initial instructional kit, including infomercials, television andradio commercials, print advertising, telemarketing and the Internet.  It uses our marketing services, includingdirect mail and e-mail campaigns, and the distribution of a bi-monthly magazinefor existing customers.

 

Natural Golf Field Sales primarily sells ourcustom-built golf clubs.  Natural GolfField Sales also sells all of our other products, but these non-equipment salestotal less than 10% of overall Natural Golf Field Sales.  The certified instructors who teach forNatural Golf Schools sell golf clubs primarily to those customers who attendedinstruction provided through Natural Golf Schools.  In addition, the instructors conduct club demonstrations to helpmarket and sell golf clubs to existing customers in their geographical area.

 

Natural Golf Schools conducts our golf schooloperations.  It develops the schoolofferings and the content of the instruction, selects, trains and certifies theinstructors, and arranges for sites to hold the

 

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instruction.  The primary schoolofferings were one-day and three-day schools held in over 150 locations.  In both 2002 and 2003 we curtailed the numberof schools due to lack of capital.

 

In 2002 we changed our fiscal year end toNovember 30 from December 31. Therefore, we have compared our audited results for the year endedNovember 30, 2003 (“fiscal 2003”) to audited results for the eleven months endedNovember 30, 2002 (“fiscal 2002”).

 

**Liquidity and capital resources**

 

As of November 30, 2003, we had a working capitaldeficit of  $6.3 million.  However, on December 17, 2003, wesuccessfully completed an initial public offering, which generated net proceedsof $10.4 million. A substantial amount of the proceeds was used to pay offexisting obligations.  As of November30, 2003 we had aggregate maturities of notes payable totaling $3.9 million.  Subsequent to year-end, we used cash of$2.94 million to retire various note payable obligations.  We also paid, subsequent to year-end, about$1.6 million to satisfy past due obligations to vendors.  As such, these transactions havesignificantly changed our financial position. During the past few years, a significant portion of management’s timehas been expended to raise funds. Additionally, due to the limited financing available to us, we wererequired to incur debt with expensive rates of interest and dilutive warrantfeatures.  It is expected that substantiallyall of this debt will be retired in fiscal 2004.

 

We incurred net losses of $5.3 million and $2.2million for fiscal 2003 and 2002, respectively, and negative cash flow fromoperations of $0.7 million for fiscal 2003 and $1.4 million for fiscal 2002.  Due to our lack of cash resources, asubstantial portion of our operations the past few years were financed by theissuance of equity instruments (many of which were attached to debt financing).These instruments resulted in significant interest charges, which while theywere non-cash charges, still resulted in significant expenses being reported inour Statement of Operations. The cash used in operations for fiscal 2003 and2002 reflects non-cash expenses of $2.7 million and $0.2 million, respectively,primarily related to these financing transactions and common stock and optionsexpected to be issued for payment of services related to an infomercial.  The fair value of these equity transactionswas determined using the Black-Sholes pricing model. Although the companyincurred losses in fiscal 2003 and 2002, the net change in working capitalgenerated cash of $1.9 million in fiscal 2003 and $0.5 million in fiscal2002.  The primary reason for thischange was an increase in accounts payable and accrued expenses of $1.7 millionand $0.8 million in fiscal 2003 and 2002, respectively, as we financed aportion of our operations by extending payments to vendors and other serviceproviders due to our limited access to cash during these periods.  In fiscal 2003 we also reduced inventorylevels, generating about $350,000 of cash.

 

Based on the pay-off of significant portion of ourdebt from proceeds of our public offering after year end, in the first quarterof 2004, the company will record additional non-cash expenses of $455,000,which relate to the write-off of unamortized financing costs and debt discountas of the date the notes were paid.  Hadthe company not repaid this debt, such amounts would have been amortized as interestexpense over the remaining term of the notes.

 

Due to the lack of resources available, we had limitedpurchases of property and equipment in fiscal 2003 and 2002, primarily relatedto product masters for our instructional materials and related materials.  We spent $376,000 in 2003 and $139,000 in2002 on these investing activities.

 

Our financing activities resulted in net cash of $1.1million in fiscal 2003 and $1.6 million in fiscal 2002.  This primarily resulted from the netproceeds of debentures and notes payable issued less related payments in bothfiscal 2003 and 2002.  In fiscal 2003 wealso incurred $492,000 in stock offering costs related to the initial publicoffering that was closed subsequent to fiscal 2003.  Such amounts along with additional public offering costs incurredsubsequent to year-end were offset against the gross

 

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proceeds of the public offering within stockholder’s equity in December2003.  In fiscal 2002 we also received$485,000 in proceeds from the issuance of common stock.

 

**consolidatedresults of opErations**

 

**Comparison of Fiscal 2003 to Fiscal2002**

 

As indicated above, our revenues have been curtailedby our inability to make marketing and advertising expenditures due to our lackof capital.  With sufficient capital tofund our customer acquisition and direct marketing programs on a consistentbasis, we expect to generate additional revenues that will ultimately lead usto a revenue level sufficient to exceed operating expenses.

 

**ConsolidatedFinancial Information**

 
|                                       |   | **2003**   |      | **2002**                     |   |
|--------------------------------------------|--------|------------|-----------|------------------------------|--------|
|                                       |   | **Amount** |      | **% of  Total  Net Revenue** |   | **Amount** |   | **%****of Total  Net Revenue** |   |
|                                       |   |       |      |                         |   |   |   |   |   |
| Total Net Revenue                          |   | $          | 9,744,221 |                         | 100.0  | % | $ | 11,572,295 |   | 100.0 | % |
|                                       |   |       |      |                         |   |   |   |   |   |
| Cost of Sales                              |   | 3,811,933  |      | 39.1                         | %      | 4,148,637 |   | 35.8 | % |
|                                       |   |       |      |                         |   |   |   |   |   |
| Gross Profit                               |   | 5,932,288  |      | 60.9                         | %      | 7,423,658 |   | 64.2 | % |
|                                       |   |       |      |                         |   |   |   |   |   |
| Selling Expenses                           |   | 5,798,320  |      | 59.5                         | %      | 6,034,871 |   | 52.1 | % |
| General and Administrative Expense         |   | 2,869,427  |      | 29.4                         | %      | 3,058,466 |   | 26.4 | % |
| Total Selling,  General and Administrative |   | 8,667,747  |      | 88.9                         | %      | 9,093,337 |   | 78.5 | % |
|                                       |   |       |      |                         |   |   |   |   |   |
| Depreciation and Amortization              |   | 275,216    |      | 2.8                          | %      | 109,267 |   | 0.9 | % |
|                                            |        |            |           |                              |        |  |  |  |  |  |  |

 

Our consolidated net revenue decreased approximately$1.8 million, or approximately 15.8%, for fiscal 2003 compared to fiscal2002.  The decrease in consolidated netrevenue was primarily attributed to a $1 million decline in equipment revenuefrom $5.9 million in fiscal 2002 to $4.9 million for fiscal 2003.  Net revenue from instruction services alsodeclined by $650,000, from $2.3 million in fiscal 2002 to $1.6 million forfiscal 2003.  Our lack of capitalresulted in a scaling back of our marketing for new customers.  The decline in equipment revenue isprimarily attributed to a reduction in the number of students attending ourschools.  We believe that the majorityof our equipment sales are driven by customer purchases of our golf instructionservices.  Golf instruction serviceswere impacted by a 34% reduction in attending students, to 4,261 students forfiscal 2003 from 6,443 students for fiscal 2002.

 

Our consolidated cost of sales percentage increasedfrom 35.8% for fiscal 2002 to 39.1% for fiscal 2003.  This increase was primarily attributed to the use of varioussales discounts and other sales incentives utilized during fiscal 2003 in orderto stimulate sales and generate cash for use in operations.

 

Selling, general and administrative expense decreasedabout $400,000 in fiscal 2003, but increased as a percentage of net revenuefrom 78.6% in fiscal 2002 to 89.0% in fiscal 2003 due to the significantdecline in net revenue.  Sellingexpenses ($5.8 million in fiscal 2003 and $6.0 million in fiscal 2002),increased as a percentage of net revenue, from 52.1% in fiscal 2002 to 59.5% infiscal 2003.  This increase is primarilydue to incurring nearly $1.0 million of costs in fiscal 2003 associated withtalent required for the production of our latest infomercial; infomercial costswere only about $200,000 in fiscal 2002. Net of infomercial production costs, selling expenses as of percentageof net revenue were comparable in fiscal 2003 and 2002, remaining atapproximately 50%.  Although general andadministrative expenses decreased approximately $189,000, they increased as apercentage of net revenue from 26.4% in fiscal 2002 to 29.4% in fiscal2003.  Another significant factor toconsider with respect to general and administrative expense is that fiscal 2002was only an 11 month period, while fiscal 2003 was

 

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a twelve month period. Therefore, the decline is even more significant and reflects theCompany’s efforts to curtail such costs due to lack of operating capital.

 

While our depreciation expense is not significant, itincreased $166,000 during fiscal 2003. This increase was mainly due to the amortization of our instructionalkit and advanced instructional series video masters commencing in fiscal 2003.

 

Our interest expense increased from $424,000 forfiscal 2002 to $2.3 million, for fiscal 2003. This increase was mainly due to additional debt financing to fund ourworking capital requirements and amortization of certain debt discounts anddeferred financing costs commencing in fiscal 2003.  Most of this increase was a non-cash interest charge.

 

Our consolidated net loss increased from $2.2 millionfor fiscal 2002 to $5.3 million for fiscal 2003.  This increase in net loss was mainly due to our decline in netrevenues and an increase in our financing costs in fiscal 2003.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity,” was issued in May 2003 and requires issuers toclassify as liabilities (or assets in some circumstances) three classes offreestanding financial instruments that embody obligations for the issuer. SFASNo. 150 is effective for financial instruments entered into or modified afterMay 31, 2003 and is otherwise effective at the beginning of the first interimperiod beginning after June 15, 2003. We believe the adoption of SFAS No. 150 will have no immediate impact onour financial position or results of operations.

 

**CRITICAL ACCOUNTING POLICIES**

 

The policies below are critical to our businessoperations and the understanding of our results of operations.  In the ordinary course of business, we makea number of estimates and assumptions relating to the reporting of our resultsof operations and financial condition in the preparation of our financialstatements in conformity with accounting principles generally accepted in theUnited States.  Certain criticalaccounting assumptions affect the reported amounts of assets, liabilities,revenues and expenses.  As a result,changes in these estimates or assumptions could significantly affect ourfinancial position or our results of operations.  Actual results may differ from these estimates under differentassumptions or conditions as discussed below. We believe that of the significant accounting policies used in thepreparation of our consolidated financial statements, the items discussed belowinvolve critical accounting estimates and high degree of judgment andcomplexity.

 

Our critical accounting policies are as follows:

Revenue recognition and allowance for sales returns;

 

Inventory valuation; and

 

Accounting for income taxes.

 

**RevenueRecognition and Allowance for Sales Returns**

 

We recognize revenue in accordance with SEC StaffAccounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB101), as amended.  SAB 101 requires thatfour basic criteria must be met before revenue can be recognized:  (1) persuasive evidence of an arrangementexists; (2)

 

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delivery has occurred or services rendered; (3) the fee is fixed anddeterminable; and (4) collectibility is reasonably assured.

 

Revenue is recognized from product sales when bothtitle and risk of loss transfer to the customer.  Generally, both risk of loss and title pass to our customers atthe date of shipment via common carrier. Sales are recorded net of an allowance for sales returns.  We offer a money-back guarantee that allowsthe customers to return most products, within 30 days of receipt, for a fullrefund of their original product purchase price, or exchange them for otherproducts.  We estimate product salereturns based upon sales levels, historical return percentages and currenteconomic trends.  If the actual costs ofsales returns significantly exceed the recorded estimated allowance, our saleswould be significantly adversely affected. Revenue is recognized from sales of our golf school instruction serviceswhen the customer has attended the instruction program and our services havebeen rendered.  We credit deferredrevenue to the extent we receive payment for products prior to shipment orprior to the rendering of services.

 

**Inventories**

 

Our inventories are valued at the lower of cost ormarket.  Cost is determined using thefirst-in, first-out (FIFO) method.  Ourinventory balances consist of the material costs of unassembled golf clubcomponents and other products bought and sold for resale without furtherprocessing or assembly.  These balancesare written down periodically to adjust for any obsolete or unmarketableinventory as impairment of such inventories is identified.  If the actual amount of obsolete or unmarketableinventory significantly exceeds the estimated amounts, our cost of productssold and gross profit would be significantly adversely affected.

 

**IncomeTaxes**

 

Deferred income taxes are recognized for the expectedtax consequences in future years for differences between the tax bases ofassets and liabilities and their financial reporting amounts, based uponenacted tax laws and statutory tax rates applicable to the periods in which thedifferences are expected to affect taxable income.  Our significant deferred tax asset is related primarily to ournet operating loss carry-forward.  Wehave had net losses from inception and have concluded that it is more likelythan not that our deferred tax assets will not be realized and as a result, wehave provided a valuation allowance for the total of our net deferred tax assetat November 30, 2003.  Theestimates for deferred tax assets and the corresponding valuation allowancerequire complex judgments.  Weperiodically review those estimates for reasonableness.  However, because the recoverability ofdeferred tax assets is directly dependent upon our future operating results,actual recoverability of deferred tax assets may differ materially from ourestimates.

 

**SEASONALITY AND ECONOMIC CONDITIONS**

 

Since consumers consider our products and servicesdiscretionary spending items, we may be adversely affected by a sustainedeconomic downturn in the economy.  Oursecond and third quarters are generally favorably affected due to the peak golfseason in the United States and Canada, our primary markets.

 

**INFLATION**

 

We do not believe that inflation had a material impactupon our results of operations during fiscal 2003 and 2002.

 

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**MARKET RISK**

 

In connection with the IPO, we paid off subsequent toyear-end our only debt that had an interest rate that had a variable rate.    We have not engaged in any hedgingactivities to offset such risks.

 

**RISK FACTORS**

 

You should carefully consider the risks, uncertaintiesand other factors described below because they could materially and adverselyaffect our business, financial condition, operating results and prospects andcould negatively impact the market price of our common stock.  Also, you should be aware that the risks anduncertainties described below are not the only ones facing us.  Additional risks and uncertainties that wedo not yet know of, or that we currently think are immaterial, may also impairour business operations.  You shouldalso refer to the other information contained in and incorporated by referenceinto this Annual Report on Form 10-KSB, including our financial statements andthe related notes.

 

***We expect tocontinue to incur losses, and we may never become profitable.***

 

We have incurred operating losses in most of thequarters in which we have been in business. Our accumulated deficit through November 30, 2003 was $4.9 million.  We expect to continue to incur losses intofiscal 2004, and we cannot be certain if or when we will becomeprofitable.  In addition, a highpercentage of our operating expenses, particularly personnel and rent, arefixed in advance of any particular quarter. We expect our operating expenses to increase significantly as weincrease the number of our employees and develop our business infrastructure inan effort to grow our marketing business. As a result, if we are not successful in acquiring new customers andgenerating increased revenues, we may not be able to achieve and maintainprofitability in the future.

 

***We may need toraise additional capital that may not be available on satisfactory terms.***

 

We may be required to raise additional capital in thefuture to meet the continued listing requirements of The American StockExchange.  We cannot be certain that wewill be able to obtain additional financing on favorable terms, if at all.  If we need additional capital and cannotraise it on acceptable terms, we may not be able to fund our marketing andpromotions programs to generate sufficient new customers or adequately investin the business to grow it profitably or maintain our listing on a nationallyrecognized exchange or quotation system.

 

***If we do not investor spend the net proceeds of our recently completed public offering of commonstock effectively, we may not be able to generate sufficient revenue to achieveprofitability.***

 

We used approximately half of the net proceeds of ourrecently completed public offering of common stock to satisfy indebtedness andobligations due.  Our management hassignificant flexibility in applying the remaining net proceeds and may not doso effectively, which could lead to us not achieving profitability.  Shareholders will have to rely on thejudgment of our management and may disagree with their decisions as to theapplication of these proceeds.  Pendingthese uses, we have invested the net proceeds from our recently completedpublic offering of common stock in government securities and other short-term,investment-grade, interest-bearing instruments.

 

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***If our infomercialmarketing and other customer acquisition techniques are not successful, we maynot be able to generate sufficient revenue to fund our operations.***

 

Our success will depend in large part on the abilityof our infomercial and other marketing programs to deliver new customers.  Moreover, our customer acquisition costs mayincrease in the future, and our customers may not spend in amounts sufficientto cover our selling and operating expenses because of economic conditions orotherwise.  There can be no assurancethat our infomercial and other customer acquisition and direct marketingprograms will be successful.  Since thisis a key element of our plan to increase revenue, if we are not able to generateincreased customer spending through these efforts, we may not achieveprofitability.  Additionally, the fundsexpended on our infomercial and other marketing programs will no longer beavailable for use in alternative marketing plans.

 

***If we do not growor are unable to manage our growth, we may not be able to generate sufficientrevenue to fund our operations, and it may result in operating inefficienciesand lost profit opportunities.***

 

Our business plan is to rapidly expand our customeracquisition efforts and spending to grow our business.  However, we may not grow as planned or atall.  If we do grow, such growth mayplace significant strains on our management personnel and other resources.  In order to manage our future growth, wewill need to continue to improve our operational, administrative and accountingsystems and to continue to attract, train, retain, motivate and manage ouremployees.  In addition, our futuresuccess will depend in large part on our ability to maintain high rates ofcustomer satisfaction, on-time delivery, inventory utilization and product andservice quality, and to optimize our student-to-teacher ratios, whilesimultaneously increasing the number of our certified instructors, productlines and marketing programs.  If we areunable to manage our growth effectively, we may not be able to retain keypersonnel or provide quality services and equipment.  In which case, we may not be able to generate sufficient revenueto fund our operations.

 

***Our overallperformance and quarterly operating results are volatile.  This could make our future performancedifficult to predict, and thereby reduce the market price of our common stock.***

 

Our quarterly revenue, expenses and operating resultshave varied significantly in the past and are likely to vary significantly fromquarter to quarter in the future.  Weexpect large fluctuations in our future quarterly operating results due to anumber of factors, including the timing and effectiveness of our marketing andadvertising programs and how well we manage our growth.  In addition, certain factors affecting ouroperating results are outside our control, including price and product changesof competitors and seasonality in the golf industry.

 

As a result of these and other factors, our results ofoperations for any particular quarter are not necessarily indicative of resultsthat may be expected for any subsequent quarter or related fiscal year.  These fluctuations in our quarterly resultscould cause our quarterly earnings to fall below market expectations.  Any failure to meet expectations ofsecurities analysts or the market in general could result in a significantdecline in the market price of our common stock and could cause these analyststo cease following our common stock. Securities class action litigation is frequently brought againstcompanies following a sharp decline in their stock price.  Any such litigation, regardless of merit,could result in substantial costs, harm our reputation, and divert ourmanagement’s attention away from the operation of our business.

 

***If we are unable toattract and retain qualified sales personnel and instructors, we may not beable to generate sufficient revenue from our golf school operations to fund ouroperations and we may not be able to compete effectively in the equipmentmarketplace****.*

 

Our business requires direct contact between ouremployees and instructors and our customers.  Accordingly, our success depends in large part upon our ability toattract, train, retain, motivate and

 

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manage our employees and instructors. We invest significant amounts of time and money to train and develop oursales personnel and instructors, and sales personnel and instructors are bothimportant to our business.  Ourinstructors are required to attend a one-week training program, for which wecharge a modest fee to cover the cost of the program.  Prior to our initial public offering in December 2003, weexperienced a high rate of attrition among our sales and administrativepersonnel, primarily due to reductions in work force caused by our financialcondition and reduced sales volumes due to our inability to fund marketingprograms.  If our sales personnel leaveshortly after training, we lose approximately two weeks investment in salesprocess and product training.  However,we have not experienced any significant turnover in certified instructors.  In the event we lose instructors, we willhave to expend additional time and resources to locate and properly train newinstructors.  Any inability to attract, trainand retain our sales personnel and instructors would impair our ability toadequately manage and staff our existing and future business.

 

***Our golf equipmentmanufacturing operations are dependent to a significant extent on our abilityto design and develop new golf equipment, which requires us to remain currentwith technological advances in the golf industry.  We may not be able to compete effectively if we do not keep upwith the continuing technological changes in the golf industry.***

** **

The golf equipment market is characterized by rapidlychanging technology designed to enhance golf equipment performance.  Accordingly, our future success will depend,in part, on our ability to continue to effectively use leading technologies inthe design and manufacture of our equipment and to develop new products andservices that meet changing customer needs.

 

In order for us to achieve and sustain profitabilityin the golf equipment market, all of these tasks must be accomplished in atimely and cost-effective manner.  Wecannot assure shareholders that we will succeed in effectively doing any ofthese tasks and our failure to do so could result in a significant decline inthe revenue we generate from equipment sales.

 

***Seasonalfluctuations in our business and unanticipated variations in our marketing andpromotional programs may impact our operating results and the value ofshareholders’ investment in us.***

** **

We derive all of our revenue from golf products and services, which wesell and market directly to our customers. We expect that we will experience seasonal fluctuations in revenuesrelating to our sales and marketing efforts. We expect that revenues in the quarters ending November 30 andFebruary 28 will typically be lower than our other two quarters due to theseasonal nature of the golf business in North America and Canada.  This seasonal trend may materially affectour quarter-to-quarter operating results. Furthermore, a large percentage of our operating expenses, particularlymarketing, personnel and rent, are fixed or committed to in advance of anyparticular quarter.  While the scope andnumber of our marketing and promotion programs may be adjusted to reflect thesuccess of each in generating new customers and revenues, these adjustmentstake time, and we must maintain a sufficient level of committed marketing andpromotion spending as well as personnel staffing to support these programs andanticipated customer spending growth. As a result, unanticipated variations in the number, scope and successof our marketing programs may cause significant variations in the amount ofrevenue we are able to generate from our operations, which could result in adecline in the market value of our common stock.

 

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***Our seniormanagement consists of a small group of individuals, and therefore the loss ofkey members of our management team could cause a significant interruption tothe conduct of our business.***

** **

Our management team consists of a small number ofpeople.  As a result, each member of ourmanagement plays a critical role in our business.  In particular, we depend on the continued employment andperformance of Andrew S. Wyant, our Chief Executive Officer and President, andThomas Herskovits, our Chairman, and other key members of our management.  Messrs. Wyant and Herskovits have beenresponsible for virtually all of our management activities for the last severalyears and are closely identified with our business.  Their continued service is critical to our business operations.  The life insurance we have obtained for Mr.Wyant may not adequately compensate us for the loss of Mr. Wyant.

 

***Our future successis dependent on our ability to compete effectively in the highly competitivegolf equipment and golf school industries.***

 

The golf equipment industry is highly competitive anddominated by a few large market participants, including Callaway (which alsoowns the Ben Hogan, Odyssey and Top-Flite brands), Adidas (which owns theTaylor Made and MaxFli brands), Nike, Fortune Brands (which owns the Titleistand Cobra brands) and Ping.  Thesecompanies have better brand recognition and significantly greater financialresources than us.  Newer and smallercompanies have also entered the market, including Rossignol (which owns theCleveland Golf brand), Adams, Wilson, Mizuno, and GenX Sports (which owns TearDrop, Ram and Tommy Armour brands), which has led to increasedcompetition.  Our large competitors tendto promote and market a premium product image focused primarily on performance.  The significant research and development,marketing and sponsorship budgets of these competitors tend to result inpremium priced products compared to smaller players in the equipment industry.  We likewise promote a premium product imagein terms of both performance and price, but with a significantly lower researchand development, marketing and sponsorship budget.

 

Many of our current and potential competitors havelonger operating histories, established reputations and greater financial, technicaland marketing resources than we do. This may place us at a disadvantage in responding to our competitors’pricing strategies, technological advances, advertising campaigns, strategicpartnerships and other initiatives. Many of our competitors have well-established relationships with ourpotential partners and have extensive knowledge of these industries.  These competitors may be able to respondmore quickly to new or emerging technologies and changes in customerrequirements and devote more resources to the development, promotion and saleof their products and services than we can. Finally, we expect to face additional competition from new entrants intothe golf school and golf equipment marketplaces because there are relativelylow barriers to entry into them.

 

***Our officers anddirectors own a significant number of shares, and have a significant influenceover shareholder actions, which could result in our taking actions that othershareholders do not approve.***

 

Our executive officers and directors beneficially ownor control, collectively, 1,421,291 shares of our common stock, or 27% of the voting power of our commonstock.  Accordingly, these persons arein a position to significantly influence the election and removal of directorsand the outcome of significantly all matters submitted to shareholders for avote.  Additionally, these persons areable to significantly influence any proposed amendment to our charter, a mergerproposal, a proposed sale of assets or other major corporate transaction or anon-negotiated takeover attempt.  Thisconcentration of ownership may discourage a potential acquiror from making anoffer to buy us, which, in turn, could depress the market price of our commonstock and impair shareholders’ ability to resell their shares at or above theinitial public offering price.

 

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***Provisions of ourarticles of incorporation and bylaws and Illinois law could deter takeoverattempts that may offer shareholders a premium, which could adversely affectthe market price of our common stock.***

 

Provisions of our articles of incorporation, bylawsand Illinois law could make it difficult for a third party to acquire us, evenif doing so would be beneficial to our shareholders.  The existence of these provisions may deprive shareholders of theopportunity to sell their shares at a premium over prevailing prices.  For example, our articles of incorporationprovide that so long as we have at least six directors, the board of directorswill be divided into three classes as nearly equal in size as possible withstaggered three-year terms.  If, in thefuture, our board is expanded to at least six directors, this classification ofour board of directors will have the effect of making it more difficult forshareholders to change the composition of the board.  In addition, our board of directors is authorized, withoutfurther shareholder approval, to issue up to two million shares of preferredstock with such rights, preferences and privileges as our board of directorsmay determine.  This means that, withoutshareholder approval, our board of directors has the authority to attachspecial rights to this preferred stock, including voting and dividend rights.  With these rights, preferred shareholderscould make it more difficult for a third party to acquire us, which coulddepress the market value of our common stock and impair shareholders’ abilityto resell their shares at or above the initial public offering price.

 

**Item 7****. Financial Statements.**

 

The financial statements listed in Part III Item 13,with the reports of independent accountants, are included in this Form 10-KSBon pages F-1, et seq.

 

**Item 8****. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure.**

 

None.

 

**Item 8A****. Controls and Procedures.**

 

We maintain a system of disclosure controls andprocedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, that are designed to provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosures.

 

 We have carriedout an evaluation under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures. Based upon their evaluation and subject tothe foregoing, the Chief Executive Officer and Chief Financial Officerconcluded that such controls and procedures were effective as of the end of theperiod covered by this report, in all material respects, to ensure thatrequired information will be disclosed on a timely basis in our reports filedunder the Exchange Act.

 

 In designing andevaluating the disclosure controls and procedures, our management recognizedthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and our management necessarily was required to apply their judgment inevaluating the cost-benefit relationship of possible controls and procedures.We believe that our disclosure controls and procedures provide reasonableassurance.

 

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**PART III**

 

**Item 9****.  Directorsand Executive Officers of the Registrant.**

 

Information with respect to directors and executiveofficers included in the definitive Proxy Statement for the Annual Meeting ofShareholders to be held on May 10, 2004 under the captions “Election ofDirectors” and “Security Ownership of Certain Beneficial Owners and Management”is incorporated herein by reference.

 

**Item 10****. Executive Compensation.**

 

Information with respect to executive compensationincluded in the definitive Proxy Statement for the Annual Meeting ofShareholders to be held on May 10, 2004 under the caption “ExecutiveCompensation” is incorporated herein by reference.

 

**Item 11****. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.**

 

Information with respect to security ownership ofcertain beneficial owners and management included in the definitive ProxyStatement for the Annual Meeting of Shareholders to be held on May 10, 2004 underthe caption “Security Ownership of Certain Beneficial Owners and Management” isincorporated herein by reference.

 

**Item 12****. Certain Relationships and Related Transactions.**

 

Information with respect to certain relationships andrelated transactions included in the definitive Proxy Statement for the AnnualMeeting of Shareholders to be held on May 10, 2004 under the caption “CertainTransactions with Management and Others” is incorporated herein by reference.

 

**Item13.****Exhibits andReports on Form 8-K.**

 

(a)           Thefollowing exhibits are filed as part of this report:

 
| 3.1*   |   | Amended and Restated Articles of Incorporation of  Registrant                                     |
|--------|--------|---------------------------------------------------------------------------------------------------|
|   |   |                                                                                              |
| 3.2*   |   | Amended and Restated Bylaws of Registrant                                                         |
|   |   |                                                                                              |
| 4*     |   | Specimen stock certificate representing Registrant’s  common stock                           |
|   |   |                                                                                              |
| 10.1*  |   | Industrial Building Lease between the Registrant and  First Industrial, L.P., dated June 29, 2001 |
|   |   |                                                                                              |
| 10.2*  |   | Registrant’s 2003 Stock Incentive Plan                                                       |
|   |   |                                                                                              |
| 10.3*  |   | Employment Agreement between the Registrant and  Andrew S. Wyant                                  |
|   |   |                                                                                              |
| 10.4*  |   | Form of Indemnification Agreement                                                                 |
|   |   |                                                                                              |
| 10.5*  |   | Form of Registrant’s Certified Instructor  Sales/Compensation Agreement                      |
|   |   |                                                                                              |
| 10.6*  |   | Consultation Agreement between Registrant and Robert  F Lukasiewicz, dated September 5, 2003 |

 

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| 10.7*  |   | Form of Lock-Up Agreement                                                                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 21*    |   | Subsidiaries of Registrant                                                                                                                                                           |
|   |   |                                                                                                                                                                                 |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                      |
|   |   |                                                                                                                                                                                 |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                      |
|   |   |                                                                                                                                                                                 |
| 32.1   |   | Certification of the Chief Executive Officer and  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*Incorporated by reference from the Exhibits to our RegistrationStatement on Form SB-2 (Reg. No. 333-107802).

 

 

(b)           Reportson Form 8-K

 

We did not file any current reports on Form 8-K duringthe fourth quarter of 2003.

 

30

----

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

**NATURAL GOLF CORPORATION**

 
| By:    | /s/ Andrew S. Wyant |                                      |
|--------|---------------------|-------------------------------------------|
|   |                | Andrew S. Wyant, Chief Executive  Officer |   |
|        |                     |                                           |  |  |

 

Date:       February27, 2004

 

In accordance with the Exchange Act, this Report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities indicated, on February   , 2004.

 
| **Name**                    |                | **Title**             |                                                                                | **Date**          |
|-----------------------------|---------------------|-----------------------|-------------------------------------------------------------------------------------|-------------------|
|                        |                |                  |                                                                                |              |
| /s/  Thomas Herskovits |                | Chairman of the Board |                                                                                | February 27, 2004 |
|  Thomas  Herskovits    |                |                  |                                                                                |              |
|                        |                |                  |                                                                                |              |
| /s/                    | Andrew S. Wyant     |                  | Chief Executive Officer and Director  (principal executive officer)                 |              | February 27, 2004 |
|                        | Andrew S. Wyant     |                  |                                                                                |              |
|                        |                |                  |                                                                                |              |
| /s/                    | Richard A. Magid    |                  | Chief Financial Officer and Director  (principal financial and accounting  officer) |              | February 27, 2004 |
|                        | Richard A. Magid    |                  |                                                                                |              |
|                        |                |                  |                                                                                |              |
| /s/                         | Kenneth  Greenblatt |                  | Director                                                                            |              | February 27, 2004 |
|                        | Kenneth  Greenblatt |                  |                                                                                |              |   |
|                        |                |                  |                                                                                |              |
| /s/                         | Robert E. Baker     |                  | Director                                                                            |              | February 27, 2004 |
|                        | Robert E. Baker     |                  |                                                                                |              |   |

 

----

 

**INDEX TOFINANCIAL STATEMENTS**

 
| **Independent Auditor’s  Report**                                                                                                                           |   | F-2    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                             |   |   |
| **Consolidated Balance Sheet - November 30, 2003**                                                                                                               |   | F-3    |
|                                                                                                                                                             |   |   |
| **Consolidated  Statements of Operations - For the Year  Ended November 30, 2003 and for the Eleven  Months Ended November 30, 2002**                            |   | F-5    |
|                                                                                                                                                             |   |   |
| **Consolidated  Statements of Changes in Stockholders’ Deficit  - For the Year Ended November 30,  2003 and for the Eleven Months Ended November 30, 2002** |   | F-6    |
|                                                                                                                                                             |   |   |
| **Consolidated  Statements of Cash Flows - For the Year  Ended November 30, 2003 and for the Eleven  Months Ended November 30, 2002**                            |   | F-7    |
|                                                                                                                                                             |   |   |
| **Notes to  Consolidated Financial Statements**                                                                                                                  |   | F-8    |

 

F-1

----

 

**INDEPENDENTAUDITOR’S REPORT**

 

Board of Directors

Natural Golf Corporation

Mt. Prospect, IL

 

 

We have audited theaccompanying consolidated balance sheet of Natural Golf Corporation andSubsidiaries as of November 30, 2003, and the related consolidated statementsof operations, stockholders’ deficit, and cash flows for the year endedNovember 30, 2003 and the eleven months ended November 30, 2002.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Natural Golf Corporationand Subsidiaries as of November 30, 2003 and the results of theiroperations and their cash flows for the year ended November 30, 2003 and theeleven months ended November 30, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 

 

HEIN & ASSOCIATES LLP

 

Denver, Colorado

January 29, 2004

 

F-2

----

 

***NATURAL GOLF CORPORATION AND SUBSIDIARIES***

 

**CONSOLIDATEDBALANCE SHEET**

 

**AS OF NOVEMBER 30, 2003**

 
| **CURRENT ASSETS:**                                        |   |      |      |
|------------------------------------------------------------|--------|-----------|-----------|
| Cash                                                       |   | $         | 400       |   |
| Accounts  receivable                                       |   | 49,531    |      |
| Inventories                                                |   | 704,896   |      |
| Prepaid expenses                                           |   | 8,433     |      |
| Total current  assets                                      |   | 763,260   |      |
|                                                       |   |      |      |
| **PROPERTY AND EQUIPMENT,**  at cost                       |   |      |      |
| Equipment                                                  |   | 329,908   |      |
| Product masters                                            |   | 557,171   |      |
| Software                                                   |   | 94,120    |      |
| Furniture and  fixtures                                    |   | 67,551    |      |
| Leasehold  improvements                                    |   | 47,804    |      |
| Total property  and equipment                              |   | 1,096,554 |      |
| Less accumulated  depreciation and amortization            |   | (542,868  | )         |
|                                                       |   |      |      |
| Property and  equipment, net                               |   | 553,686   |      |
|                                                       |   |      |      |
| **OTHER ASSETS**:                                          |   |      |      |
| Deferred  financing costs, net of accumulated amortization |   | 264,208   |      |
| Deferred stock  offering costs                             |   | 492,216   |      |
| Deposits and  other                                        |   | 66,074    |      |
| Total other  assets                                        |   | 822,498   |      |
|                                                       |   |      |      |
| **TOTAL ASSETS**                                           |   | $         | 2,139,444 |   |

 

***See accompanying notes to these consolidated financialstatements.***

 

F-3

----

 
| **CURRENT LIABILITIES:**                                                                |   |        |      |
|-----------------------------------------------------------------------------------------|--------|-------------|-----------|
| Current portion  of notes payable, including $450,000 to related parties                |   | $           | 3,130,325 |   |
| Trade accounts  payable, including $59,720 to related parties                           |   | 1,700,310   |      |
| Deferred revenue                                                                        |   | 222,171     |      |
| Accrued  expenses:                                                                      |   |        |      |
| Advertising                                                                             |   | 498,072     |      |
| Commissions                                                                             |   | 187,696     |      |
| Interest                                                                                |   | 410,003     |      |
| Payroll                                                                                 |   | 137,699     |      |
| Royalties                                                                               |   | 94,475      |      |
| Other                                                                                   |   | 635,911     |      |
| Total current  liabilities                                                              |   | 7,016,662   |      |
|                                                                                    |   |        |      |
| Long-term  obligations,****net of current portion                                       |   | 37,919      |      |
|                                                                                    |   |        |      |
| **TOTAL LIABILITIES**                                                                   |   | 7,054,581   |      |
|                                                                                    |   |        |      |
| **COMMITMENTS AND CONTINGENCIES**(Notes  4 and 7)                                       |   |        |      |
|                                                                                    |   |        |      |
| **STOCKHOLDERS’ DEFICIT**                                                          |   |        |      |
| Preferred stock,  2,000,000 and no shares authorized, none outstanding                  |   | —      |      |
| Common stock, no  par value, 18,000,000 shares authorized, 2,521,254 shares outstanding |   | 10,128,876  |      |
| Additional  paid-in capital                                                             |   | 2,941,049   |      |
| Common stock and  options issuable                                                      |   | 599,500     |      |
| Treasury stock,  at cost                                                                |   | (50,000     | )         |
| Accumulated  deficit                                                                    |   | (18,534,562 | )         |
|                                                                                    |   |        |      |
| Total  stockholders’ deficit                                                       |   | (4,915,137  | )         |
|                                                                                    |   |        |      |
| **TOTAL LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                   |   | $           | 2,139,444 |   |

 

***See accompanying notes to these consolidated financialstatements.***

 

F-4

----

 

***NATURAL GOLF CORPORATION AND SUBSIDIARIES***

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**FOR THE YEAR ENDED NOVEMBER 30, 2003 ANDTHE ELEVEN MONTHS ENDED NOVEMBER 30, 2002**

 
|                                                                      |   | **FOR THE********YEAR********ENDED  NOVEMBER 30,  2003** |       | **FOR THE********ELEVEN  MONTHS********ENDED  NOVEMBER 30,  2002** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------------------------|------------|--------------------------------------------------------------------|--------|
|                                                                      |   |                                                     |       |                                                               |   |
| **NET SALES**:                                                            |   |                                                     |       |                                                               |   |
| Products                                                                  |   | $                                                        | 8,101,849  |                                                               | $      | 9,285,443 |   |
| Services                                                                  |   | 1,642,372                                                |       | 2,286,852                                                          |   |
| Total net sales                                                           |   | 9,744,221                                                |       | 11,572,295                                                         |   |
|                                                                      |   |                                                     |       |                                                               |   |
| **COST OF  SALES**:                                                       |   |                                                     |       |                                                               |   |
| Cost of products sold                                                     |   | 2,788,734                                                |       | 2,719,535                                                          |   |
| Cost of services provided                                                 |   | 1,023,199                                                |       | 1,429,102                                                          |   |
| Total cost of sales                                                       |   | 3,811,933                                                |       | 4,148,637                                                          |   |
|                                                                      |   |                                                     |       |                                                               |   |
| **GROSS  PROFIT**                                                         |   | 5,932,288                                                |       | 7,423,658                                                          |   |
|                                                                      |   |                                                     |       |                                                               |   |
| **OPERATING  EXPENSES**:                                                  |   |                                                     |       |                                                               |   |
| Selling expenses                                                          |   | 5,798,320                                                |       | 6,034,871                                                          |   |
| General and administrative expense                                        |   | 2,869,427                                                |       | 3,058,466                                                          |   |
| Depreciation and amortization                                             |   | 275,216                                                  |       | 109,267                                                            |   |
| Total operating costs                                                     |   | 8,942,963                                                |       | 9,202,604                                                          |   |
|                                                                      |   |                                                     |       |                                                               |   |
| **LOSS FROM  OPERATIONS**                                                 |   | (3,010,675                                               | )          | (1,778,946                                                         | )      |
|                                                                      |   |                                                     |       |                                                               |   |
| **OTHER  EXPENSE**:                                                       |   |                                                     |       |                                                               |   |
| Interest expense                                                          |   | (2,267,711                                               | )          | (424,320                                                           | )      |
| Other expense, net                                                        |   | (25,085                                                  | )          | (9,719                                                             | )      |
| Total other expense, net                                                  |   | (2,292,796                                               | )          | (434,039                                                           | )      |
|                                                                      |   |                                                     |       |                                                               |   |
| **NET LOSS**                                                              |   | $                                                        | (5,303,471 | )                                                                  | $      | (2,212,985 | ) |
|                                                                      |   |                                                     |       |                                                               |   |
| **NET LOSS  PER COMMON SHARE (BASIC AND DILUTED)**                        |   | $                                                        | (2.18      | )                                                                  | $      | (1.06 | ) |
|                                                                      |   |                                                     |       |                                                               |   |
| **WEIGHTED-AVERAGE  NUMBER OF SHARES OUTSTANDING****(BASIC AND DILUTED)** |   | 2,433,360                                                |       | 2,084,502                                                          |   |

 

***See accompanying notes to these consolidated financialstatements.***

 

F-5

----

 

***NATURAL GOLF CORPORATION AND SUBSIDIARIES***

 

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT**

 

**FOR THE YEAR ENDED NOVEMBER 30, 2003 ANDTHE ELEVEN MONTHS ENDED NOVEMBER 30, 2002**

 
|                                                                                                       |   | **COMMON********SHARES********OUTSTANDING** |   | **COMMON********STOCK** |       | **ADDITIONAL  PAID-IN********CAPITAL** |   | **COMMON********STOCK********AND********OPTIONS  ISSUABLE** |   | **TREASURY  STOCK** |    | **ACCUMULATED  DEFICIT** |    | **TOTAL  STOCKHOLDERS’  DEFICIT** |   |
|------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|-------------------------|------------|----------------------------------------|--------|-------------------------------------------------------------|--------|---------------------|---------|--------------------------|---------|----------------------------------------|--------|
|                                                                                                       |   |                                        |   |                    |       |                                   |   |                                                        |   |                |    |                     |    |                                   |   |
| **BALANCES**, January 1,  2002                                                                             |   | 2,002,771                                   |   | $                       | 7,663,416  |                                   | $      | 286,000                                                     |   | —              |    | $                        | (44,000 | )                                      | $      | (11,018,106 | ) | $ | (3,112,690 | ) |
| Issuance of common stock:                                                                                  |   |                                        |   |                    |       |                                   |   |                                                        |   |                |    |                     |    |                                   |   |
| Cash                                                                                                       |   | 122,500                                     |   | 485,000                 |       | —                                 |   | —                                                      |   | —              |    | —                   |    | 485,000                                |   |
| Conversion of related party payables                                                                       |   | 141,567                                     |   | 566,266                 |       | —                                 |   | —                                                      |   | —              |    | —                   |    | 566,266                                |   |
| Warrants issued for terminated employee settlement                                                         |   | —                                      |   | —                  |       | 322,932                                |   | —                                                      |   | —              |    | —                   |    | 322,932                                |   |
| Compensation related to warrants issued for endorsement                                                    |   | —                                      |   | —                  |       | 18,000                                 |   | —                                                      |   | —              |    | —                   |    | 18,000                                 |   |
| Repurchase of common stock                                                                                 |   | (1,000                                      | )      | —                  |       | —                                 |   | —                                                      |   | (6,000              | )       | —                   |    | (6,000                                 | )      |
| Net loss                                                                                                   |   |                                        |   | —                  |       | —                                 |   | —                                                      |   | —              |    | (2,212,985               | )       | (2,212,985                             | )      |
| **BALANCES**, November 30,  2002                                                                           |   | 2,265,838                                   |   | 8,714,682               |       | 626,932                                |   | —                                                      |   | (50,000             | )       | (13,231,091              | )       | (3,939,477                             | )      |
| Payment of note principal and interest                                                                     |   | 247,666                                     |   | 1,383,194               |       | —                                 |   | —                                                      |   | —              |    | —                   |    | 1,383,194                              |   |
| Settlement of compensation claim                                                                           |   | 7,750                                       |   | 31,000                  |       | —                                 |   | —                                                      |   | —              |    | —                   |    | 31,000                                 |   |
| Discount on secured debentures due to issuance of detachable warrants  and beneficial conversion feature   |   | —                                      |   | —                  |       | 1,025,782                              |   | —                                                      |   | —              |    | —                   |    | 1,025,782                              |   |
| Discount on investor notes due to issuance of detachable warrants                                          |   | —                                      |   | —                  |       | 52,209                                 |   | —                                                      |   | —              |    | —                   |    | 52,209                                 |   |
| Options issued in connection with marketing consulting agreement                                           |   | —                                      |   | —                  |       | 18,600                                 |   | —                                                      |   | —              |    | —                   |    | 18,600                                 |   |
| Warrants issued in connection with endorsement agreement                                                   |   | —                                      |   | —                  |       | 7,000                                  |   | —                                                      |   | —              |    | —                   |    | 7,000                                  |   |
| Warrants issued to placement agent in connection with secured  debenture offering                          |   | —                                      |   | —                  |       | 52,448                                 |   | —                                                      |   | —              |    | —                   |    | 52,448                                 |   |
| Discount on unsecured debentures due to issuance of detachable  warrants and beneficial conversion feature |   | —                                      |   | —                  |       | 993,305                                |   | —                                                      |   | —              |    | —                   |    | 993,305                                |   |
| Warrants issued to placement agent in connection with unsecured  debenture offering                        |   | —                                      |   | —                  |       | 81,823                                 |   | —                                                      |   | —              |    | —                   |    | 81,823                                 |   |
| Common stock and options  to be  issued for infomercial talent                                        |   | —                                      |   | —                  |       | —                                 |   | 599,500                                                     |   | —              |    | —                   |    | 599,500                                |   |
| Warrants issued to secured debenture holders to extend maturity date                                       |   | —                                      |   | —                  |       | 66,700                                 |   | —                                                      |   | —              |    | —                   |    | 66,700                                 |   |
| Imputed interest on advances from directors                                                                |   | —                                      |   | —                  |       | 16,250                                 |   | —                                                      |   | —              |    | —                   |    | 16,250                                 |   |
| Net loss                                                                                                   |   | —                                      |   | —                  |       | —                                 |   | —                                                      |   | —              |    | (5,303,471               | )       | (5,303,471                             | )      |
| **BALANCES**, November 30,  2003                                                                           |   | 2,521,254                                   |   | $                       | 10,128,876 |                                   | $      | 2,941,049                                                   |   | $                   | 599,500 |                     | $       | (50,000                                | )      | $ | (18,534,562 | ) | $ | (4,915,137 | ) |
|                                                                                                            |        |                                             |        |                         |            |                                        |        |                                                             |        |                     |         |                          |         |                                        |        |  |  |  |  |  |  |

 

***See accompanying notes to these consolidated financialstatements.***

 

F-6

----

 

***NATURAL GOLF CORPORATION AND SUBSIDIARIES*CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                              |   | **FOR THE  YEAR  ENDED  NOVEMBER 30,  2003** |       | **FOR THE  ELEVEN  MONTHS ENDED  NOVEMBER 30,  2002** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------------------|------------|-------------------------------------------------------|--------|
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                        |   |                                         |       |                                                  |   |
| Net loss                                                                          |   | $                                            | (5,303,471 | )                                                     | $      | (2,212,985 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                         |       |                                                  |   |
| Non-cash items  included in net loss:                                             |   |                                         |       |                                                  |   |
| Depreciation and  amortization                                                    |   | 275,215                                      |       | 109,267                                               |   |
| Amortization of  debt discount/deferred financing costs                           |   | 1,763,183                                    |       | 131,076                                               |   |
| Imputed interest  on director’s advances                                     |   | 16,250                                       |       |                                                  |   |
| Provision for  doubtful accounts                                                  |   | (6,500                                       | )          | (15,000                                               | )      |
| Compensation  related to warrants and options issued for services                 |   | 25,600                                       |       | 18,000                                                |   |
| Common stock and  options to be issued for infomercial talent                     |   | 599,500                                      |       | —                                                |   |
| Common stock  issued to settle compensation claim                                 |   | 31,000                                       |       | —                                                |   |
| Changes in  assets and liabilities:                                               |   |                                         |       |                                                  |   |
| (Increase)  decrease in assets:                                                   |   |                                         |       |                                                  |   |
| Accounts  receivable                                                              |   | (265                                         | )          | 29,568                                                |   |
| Inventories                                                                       |   | 350,074                                      |       | (132,491                                              | )      |
| Prepaid expenses                                                                  |   | 93,512                                       |       | (36,977                                               | )      |
| Deposits                                                                          |   | 1,735                                        |       | (3,426                                                | )      |
| Increase  (decrease) in liabilities:                                              |   |                                         |       |                                                  |   |
| Accounts payable                                                                  |   | 526,761                                      |       | 281,042                                               |   |
| Deferred revenue                                                                  |   | (184,509                                     | )          | (122,077                                              | )      |
| Accrued expenses                                                                  |   | 1,126,381                                    |       | 515,866                                               |   |
| Net cash used in  operating activities                                            |   | (685,534                                     | )          | (1,438,137                                            | )      |
|                                                                              |   |                                         |       |                                                  |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                        |   |                                         |       |                                                  |   |
| Cash purchases  of property and equipment                                         |   | —                                       |       | (57,681                                               | )      |
| Increase in  product masters                                                      |   | (375,627                                     | )          | (81,100                                               | )      |
|  Net cash  used in investing activities                                      |   | (375,627                                     | )          | (138,781                                              | )      |
|                                                                              |   |                                         |       |                                                  |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                        |   |                                         |       |                                                  |   |
| Proceeds from  notes issued                                                       |   | 559,100                                      |       | 1,345,000                                             |   |
| Proceeds from  secured debentures issued                                          |   | 400,000                                      |       | —                                                |   |
| Proceeds from  unsecured debentures issued                                        |   | 1,263,683                                    |       | —                                                |   |
| Payments on  notes payable                                                        |   | (449,315                                     | )          | (46,260                                               | )      |
| Debt issue costs  incurred                                                        |   | (220,091                                     | )          | (223,889                                              | )      |
| Stock offering  costs incurred                                                    |   | (492,216                                     | )          | —                                                |   |
| Proceeds from  issuance of common stock                                           |   | —                                       |       | 485,000                                               |   |
| Repurchase of  common stock                                                       |   | —                                       |       | (6,000                                                | )      |
|  Net cash  provided by financing activities                                  |   | 1,061,161                                    |       | 1,553,851                                             |   |
|                                                                              |   |                                         |       |                                                  |   |
| **NET INCREASE (DECREASE) IN CASH**                                               |   | —                                       |       | (23,067                                               | )      |
| **CASH ,** at beginning of period                                                 |   | 400                                          |       | 23,467                                                |   |
| **CASH ,** at end of  period                                                      |   | $                                            | 400        |                                                  | $      | 400 |   |
| **SUPPLEMENTAL SCHEDULE OF CASH FLOW  INFORMATION:**                              |   |                                         |       |                                                  |   |
| Cash paid during  the period for interest                                         |   | $                                            | 152,630    |                                                  | $      | 16,248 |   |
| **SUPPLEMENTAL SCHEDULE OF NON-CASH  INVESTING AND****FINANCING ACTIVITIES:**     |   |                                         |       |                                                  |   |
| Related party  payables converted to stock                                        |   | $                                            | —     |                                                  | $      | 566,266 |   |
| Warrants issued  in settlement of outstanding liability                           |   | $                                            | —     |                                                  | $      | 322,932 |   |
| Accounts payable  converted to a short-term promissory note                       |   | $                                            | —     |                                                  | $      | 93,706 |   |
| Notes payable  issued in exchange for property                                    |   | $                                            | —     |                                                  | $      | 78,843 |   |
| Conversion of  notes to secured debentures                                        |   | $                                            | 905,000    |                                                  | $      | — |   |
| Stock issued in  payment of notes and accrued interest                            |   | $                                            | 1,383,194  |                                                  | $      | — |   |
| Debt discount                                                                     |   | $                                            | 2,071,296  |                                                  | $      | — |   |
| Warrants issued  in payment of financing costs                                    |   | $                                            | 200,971    |                                                  | $      | — |   |

 

***See accompanying notes to these consolidated financialstatements.***

 

F-7

----

 

***NATURAL GOLF CORPORATION AND SUBSIDIARIES***

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

 

1.                                       **ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:**

 

*Nature of Operations* – The Company is a golf instruction companythat provides a total system for playing better golf, including a grip, stance,swing and equipment different from conventional golf systems.  Most of the Company’s revenue is derivedfrom three sources: selling instructional products, including videotapes, DVDs,books, practice devices and accessories; conducting golf schools in over 200major markets in the United States; and selling custom-fitted golf clubsspecially designed for the Natural Golf swing. The Company operates in three subsidiaries, of which Natural Golf Corporationis the parent company.  These subsidiariesare based on natural groups of revenue production within the Company includinggolf school revenue; product sales generated in the field; and product salesgenerated from infomercials and other media advertising, the Internet andtelemarketing efforts.

 

*Principles of Consolidation* – The consolidated financial statementsinclude the accounts of Natural Golf Corporation and its three wholly ownedsubsidiaries, Natural Golf Products Corporation, Natural Golf Field SalesCorporation and Natural Golf Schools Corporation (collectively referred to asthe “Company”).  All significantinter-company accounts and transactions have been eliminated.

 

*Change in Year End* – During 2002, the Company changed its yearend from December 31 to November 30.

 

*Cash Equivalents* – For purposes of the statement of cashflows, the Company considers all highly liquid debt instruments with originalmaturities of three months or less to be cash equivalents.

 

*Receivables and Credit Policies* – Normally the Company requires customerpayment at the time of sale.  Inconnection with certain promotions, however, the Company offers a deferredfinancing arrangement where up to 3 monthly payments can be made.  Trade receivables consist of obligationsunder these deferred arrangements, are uncollateralized and do not bearinterest.  Management reviews tradereceivables periodically and reduces the carrying amount by a valuationallowance that reflects management’s best estimate of the amount that may notbe collectable.  As of November 30, 2003,accounts receivable are net of an allowance for doubtful accounts of $7,500.

 

*Inventories*– Inventories are valued at the lower of cost or market.  The Company values all inventories utilizingthe first-in, first-out method. Inventory cost generally includes finished goods and components.  Inventories are reviewed periodically anditems considered to be slow moving or obsolete are reduced to estimated netrealizable value through an appropriate reserve.  Inventories consist of the following at November 30, 2003:

 

| Components -  unassembled golf club parts |   | $       | 556,169 |   |
|-------------------------------------------|--------|---------|---------|--------|
| Finished goods                            |   | 194,727 |    |
|                                      |   |    |    |
|                                      |   | 750,896 |    |
| Inventory  reserve                        |   | (46,000 | )       |
|                                      |   |    |    |
| Net inventory                             |   | $       | 704,896 |   |

 

F-8

----

 

*Propertyand Equipment* – Property and equipment are stated atcost.  Depreciation is provided over theestimated useful lives of the assets ranging from three to seven years usingthe straight-line method of depreciation. Leasehold improvements are stated at cost and amortized over theremaining life of the lease, using the straight-line method.  The cost of normal maintenance and repairsis charged to operating expenses as incurred. Material expenditures that increase the life of an asset are capitalizedand depreciated over the estimated remaining useful life of the asset.  Upon the disposition of assets, the relatedcost and accumulated depreciation are removed from the books and the realizedgain or loss, if any, is recognized in the year of the disposition.

 

Costs incurred to produceproduct masters are capitalized. Product masters are principally comprised of production masters for ourinstructional materials, including videotapes, DVDs, books and relatedpackaging.  During fiscal 2003 and 2002the Company incurred costs of $375,627 and $81,100, respectively for itsproduct masters.  The Company amortizesthese costs using the forecast computation method, which amortizes such costsas actual revenue is earned over the estimated total expected revenues.  The Company continues to modify futureexpected revenues based on additional information as it becomes available.  Amortization expense related to the videoproduct masters during fiscal 2003 and 2002 was $153,270 and $0, respectively.

 

*Deferred Financing Costs* – The Company capitalizes costs associatedwith the issuance of debt instruments. These costs are amortized on a straight-line basis over the term of thedebt agreements.  Amortization expensesfor deferred financing costs were $380,743 and $0 for fiscal 2003 and 2002, respectively.

 

*Deferred Stock Offering Costs* – The Company capitalizes costs associatedwith the issuance of stock as they are incurred.  Upon issuance of the stock, such issue costs are treated as areduction of the offering proceeds and accordingly charged to common stock, nopar value.  During fiscal 2003 theCompany incurred costs of $492,216 related to an initial public offering ofstock that was completed subsequent to November 30, 2003.  This amount is reflected on the balancesheet in Other Assets as of November 30, 2003.

 

*RevenueRecognition and Sales Incentives* – The Company recognizesrevenue in accordance with SEC Staff Accounting Bulletin No. 101, RevenueRecognition in Financial Statements (SAB 101), as amended by SAB 101A and101B.  SAB 101 requires that four basiccriteria must be met before revenue can be recognized: (1) persuasive evidenceof an arrangement exists; (2) delivery has occurred or services rendered; (3)the fee is fixed and determinable; and (4) collectibility is reasonably assured.

 

The Company recognizes revenue from product sales whenrisk of loss for and title to its products pass to the buyer.  Generally, both risk of loss and title passto the Company’s customers at the date of shipment via common carrier.  The Company also offers the right of returnfor certain inventory, for which the Company estimates a return allowance.  The Company recognizes revenue from golfinstruction services when those services have been performed.  Deferred revenue represents customerprepayments, which are recognized as revenue when product is shipped, or whenthe golf instruction services have been rendered to the attendingcustomer.  Generally, the Companyreceives payment from its customers prior to or at the time the product isshipped or the service is rendered.

 

F-9

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The Company offers sales incentives to customers fromtime to time.  Cash incentives such asdiscounts or instant rebates are included in the determination of netsales.  Company gift certificates issuedto customers at the time of sale of another product or service are included inthe determination of cost of sales.  Thecost of incentives is recognized at the later of the date at which the relatedsale is recognized or the date at which the incentive is offered.

 

*Advertising Costs* – Advertising costs for the Company areexpensed as incurred, including costs to produce infomercials, televisioncommercials and print advertisements. Advertising charged to expense during fiscal 2003 and 2002 was$2,948,763 and $2,257,630, respectively.

 

*Research and Development* – The costs associated with research anddevelopment for new products and significant product improvements are expensedas incurred.  Research and developmentexpense for fiscal 2003 and 2002 was $78,000 and $104,000, respectively.  These costs were primarily for new golf clubdesign and related tooling.

 

*Comprehensive Income (Loss**) –*Comprehensive income is defined as all changes in stockholders’ equity(deficit), exclusive of transactions with owners, such as capitalinvestments.  Comprehensive incomeincludes net income or loss, changes in certain assets and liabilities that arereported directly in equity such as translation adjustments on investments inforeign subsidiaries and unrealized gains (losses) on available-for-salesecurities.  For fiscal 2003 and 2002,the Company’s comprehensive loss was the same as its net loss.

 

*Stock-BasedCompensation* - The Company accounts for stock-basedcompensation for employees using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued toEmployees*, and related interpretations.  Accordingly, compensation cost for stock options granted toemployees is measured as the excess, if any, of the quoted market price of theCompany’s common stock at the measurement date (generally, the date of grant)over the amount an employee must pay to acquire the stock.

 

The Company accounts for stock-based compensation fornon-employees under *Accounting for Stock-Based Compensation*(SFAS No. 123).  SFAS No. 123requires that options, warrants, and similar instruments that are granted tonon-employees for goods and services be recorded at fair value on the grantdate.  Fair value is generallydetermined under an option-pricing model using the criteria set forth inSFAS No. 123.  The Company issubject to the pro forma disclosure requirements for stock-based compensationfor employees.

 

*Income Taxes**–* TheCompany follows Financial Accounting Standard (FAS) 109, *Accounting for Income Taxes*,which requires an asset and liability approach to financial accounting andreporting for income taxes.  Deferredincome tax assets and liabilities are computed annually for differences betweenthe financial statement and tax bases of assets and liabilities that willresult in taxable or deductible amounts in the future based on enacted tax lawsand rates applicable to the period in which the differences are expected toaffect taxable income.  Valuationallowances are established when necessary to reduce deferred tax assets to theamount expected to be realized.  Incometax (benefit) expense is the tax payable or refundable for the period plus orminus the change during the period in deferred tax assets and liabilities.

 

F-10

----

 

*NetIncome (Loss) Per Share* – Basic earnings per share (EPS)is calculated by dividing the income or loss available to common shareholdersby the weighted average number of common shares outstanding for theperiod.  Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock.  Due to losses incurred, basic and dilutedearnings per share were the same.  Commonstock equivalents, which are comprised of issuable securities, options,warrants and convertible debentures and notes of 1,697,667 and 231,983 as ofNovember 30, 2003 and November 30, 2002, respectively, have been omitted fromearnings per share.

 

*Use of Estimates* – The preparation of consolidated financialstatements in conformity with generally accepted accounting principles in theUnited States of America requires management to make estimates and assumptionsthat affect certain reported amounts and disclosures.  Actual results could differ from those estimates.  Significant estimates include sales returns,inventory reserves and valuation allowances associated with deferred taxassets.  It is reasonably possible thatestimates will change in the forthcoming year and revisions could be material.

 

*Financial Instruments* – The estimated fair value of cash and cashequivalents, accounts receivable, accounts payable and accrued expensesapproximate their carrying amounts in the financial statements due to theshort-term nature of these instruments.

 

Based on the borrowing ratescurrently available to the Company for loans with similar terms and averagematurities, the fair value of long-term debt approximates its carrying value.

 

*Concentrations**of Supply* – During fiscal2003 approximately 70% of the Company’s inventories were purchased from fivemajor suppliers.  If the Company’srelationship with these suppliers were to cease, management believes there aresufficient alternative suppliers, such that there would not be a significantadverse impact on the operations of the Company.

 

*Recent Pronouncements* – SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity*, was issued in May 2003 and requires issuers to classify asliabilities (or assets in some circumstances) three classes of freestandingfinancial instruments that embody obligations for the issuer.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003 and is otherwiseeffective at the beginning of the first interim period beginning after June 15,2003.  Management believes the adoptionof SFAS No. 150 will have no immediate impact on its financial position orresults of operations.

 

2.                                       **INITIAL****PUBLIC OFFERING SUBSEQUENT TO YEAR-END****:**

 

On December 17, 2003, theCompany successfully completed an initial public offering (the “IPO”) of 2.5million shares of common stock.  The netproceeds from the stock offering, after deducting underwriting fees andoffering expenses, were $10,439,000. The proceeds are being used to pay off outstanding obligations, developnew infomercials and other advertisements, fund advertising and promotioncampaigns, and implement a total enterprise information and financial system.

 

In connection with theclosing of the stock offering, the Company issued to its underwriter five-yearwarrants to purchase 250,000 shares of common stock at an exercise price of$8.25 per share.

 

F-11

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3.                                       **LIQUIDITY****:**

 

The Company’s businessstrategy is to become a leading golf instruction company by direct marketing togolf consumers the benefits of the Natural Golf system.  As of November 30, 2003, the Company had aworking capital deficit of ($6,253,402) and had incurred operating losses of($4,789,621) over the past two years. Due to the lack of funds, the Company’s marketing efforts have beenseverely restricted during these past two years.  Accordingly, the sales for fiscal 2001 of $16.0 million havefallen to $9.7 million in fiscal 2003. In December 2003 the Company completed an initial public offering andraised net proceeds of $10.4 million (See Note 2) in order to properlycapitalize the Company.  After payingoff certain obligations, the net proceeds will be primarily used to drive theacquisition of new customers and increased revenues.

 

Although management cannotassure that future operations will be profitable or that additional debt orequity will be raised, it believes that its capital resources will be adequateto maintain and realize its strategy. Should losses continue at the current rate, however, it could adverselyaffect future operations.

 

4.                                       **NOTES****PAYABLE AND LONG-TERM DEBT****:**

 

Notes payable and long-termdebt consist of the following as of November 30, 2003:

 
| Note payable to  bank (see (a) below)                                       |   | $          | 200,000 |   |
|-----------------------------------------------------------------------------|--------|------------|---------|--------|
| Fiscal 2003  secured convertible notes payable to investors (see (b) below) |   | 1,204,282  |    |
| Notes payable to  investors (see (c) below)                                 |   | 744,930    |    |
| Fiscal 2003  convertible notes payable to foreign investors (see (d) below) |   | 621,018    |    |
| Fiscal 2001  convertible notes payable to investors (see (e) below)         |   | —     |    |
| Notes payable to  individuals (see (f) below)                               |   | —     |    |
| Note payable to  former officer (see (g) below)                             |   | 75,000     |    |
| Advances from  officer and director (see (h) below)                         |   | 250,000    |    |
| Other                                                                       |   | 73,014     |    |
| Total notes  payable                                                        |   | 3,168,244  |    |
| Less current  maturities                                                    |   | (3,130,325 | )       |
|                                                                        |   |       |    |
| Notes payable,  less current maturities                                     |   | $          | 37,919  |   |

 

As of November 30, 2003,aggregate maturities of notes payable are as follows:

 
| 2004           |   | $         | 3,878,778 |   |
|----------------|--------|-----------|-----------|--------|
| 2005           |   | 27,393    |      |
| 2006           |   | 10,526    |      |
| Total payments |   | 3,916,697 |      |
| Less discount  |   | (748,453  | )         |
|           |   |      |      |
| Balance        |   | $         | 3,168,244 |   |

 

F-12

----

 

(a)                 Notepayable to bank:

 

The note payable to bank of $200,000 bears interestpayable monthly at the bank’s prime rate less 0.5% (prime was 4.5% at November30, 2003).  The principal originally dueDecember 30, 2002 was extended through October 30, 2003.  Subsequently, the Bank verbally agreed thatthe remaining principal balance would be due upon the earlier of November 17,2003 or the completion of the initial public offering.  The Company’s Chairman is the guarantor.

 

Subsequent to November 30, 2003, the Company fullyrepaid the note payable to bank.

 

(b)                Fiscal 2003secured convertible notes payable to investors:

 

The secured convertible notes payable to investors of$1,305,000 are net of unamortized discount of $100,718 as of November 30,2003.  The interest rate on the notes is10%.  Included in these notes is$100,000 to a director/officer.

 

During fiscal 2003 the Company sold 8 units (theUnits) in a private placement offering (PPO) at $50,000 per unit, totaling$400,000.  Additionally, certain priornoteholders had the right to convert their notes into Units of the PPO.  Noteholders holding $905,000 of these noteshave converted them into the Units in this PPO (see Notes 2c and 2fbelow).  Each Unit is comprised of oneconvertible debenture and five-year warrants to purchase 12,500 shares of theCompany’s common stock at $4.00 per share, totaling 326,250 warrants.  The debentures are convertible into commonstock at $4.00 per share, were originally due December 31, 2003, and arecollateralized by inventories.

 

The warrants were valued at $512,891, which also resultedin an effective beneficial conversion feature of $512,891.  The estimated fair value of the warrants andbeneficial conversion feature totaling $1,025,782 is treated as a discount onthe debt and is being amortized over the term of the debenture.  The fair value of the warrants was estimatedon the grant date using the Black-Scholes pricing model with the followingassumptions: common stock based on a market price of $4.00 per share, zerodividends, expected volatility of 100%, risk-free interest rate of 6% and anexpected life of three years.

 

During fiscal 2003 holders of $1,030,000 of debenturesagreed to extend the maturity to June 30, 2004 and the Company issuedadditional warrants to purchase 25,750 shares of common stock exercisable at$4.00 per share to these holders.  Theseadditional warrants were valued at $66,700 under the Black-Scholes pricingmethod using the same assumptions set forth above, and such amount wascapitalized as a deferred financing cost and is being amortized through the extendedmaturity date.

 

A placement agent received a 10% cash commission onUnits placed by the placement agent.  Inaddition, the placement agent received warrants to purchase 20,250 shares ofthe Company’s common stock at an exercise price of $4.00 per share, expiringfive years from the date of grant.  Theplacement agent may also receive warrants equal to 10% of the total shares ofcommon stock that are issued upon exercise of the warrants sold in the PPO.

 

F-13

----

 

Subsequent to November 30, 2003, the Company paid$275,000 of principal, plus interest, to those investors who did not agree toextend the maturity on the notes payable. The Company also paid $130,209 of principal, plus interest, to anotherdebenture holder who agreed to take early repayment without penalty to theCompany.

 

(c)                 Notes payable toinvestors:

 

The notes payable to investors of $750,000 are net ofunamortized discount of $5,070 as of November 30, 2003.  The interest rate on the notes is 30% (10%in cash and 20% in the form of common stock).

 

•                  $200,000 ofthese notes matured October 15, 2002, but was subsequently extended tomature November 1, 2003.  The interestpayable in stock was originally at the rate of $10.00 per share.  As consideration for extension of thesenotes, interest in the form of common stock is paid at a rate of $4.00 pershare.

 

•                  $500,000of these notes matured July 1, 2003, but was subsequently extended tomature November 1, 2003 ($100,000 of these notes are to the daughter and son ofa director/stockholder of the Company). The interest payable in stock was at the rate of $4.00 per share.

 

•                  $50,000of these notes matured October 7, 2002, but was subsequently extended to matureDecember 30, 2003.  The interest payablein stock was at the rate of $10.00 per share. As consideration for the renewals, the Company issued to the holderfive-year warrants to purchase 55,000 shares of common stock at $4.00 pershare.  The warrants were valued in theaggregate at $52,209, which is treated as a discount of the debt and is beingamortized over the term of the note. The fair value of the warrants was estimated on the grant date using theBlack-Scholes pricing model with the following assumptions: common stock basedon a market price of $4.00 per share, zero dividends, expected volatility of100%, risk-free interest rate of 6% and an expected life of three years.

 

•                  $50,000of these notes matured October 7, 2002. The interest payable in stock was at the rate of $10.00 per share.  These notes were converted into a debtsecurity sold in a private placement offering on January 3, 2003 (see Note2b above).

 

F-14

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All of the notes referenced above contain prepaymentand acceleration provisions. Additionally, with respect to $700,000 of notes maturingNovember 1, 2003, in the event that a transaction or series oftransactions occurs that provides $5,000,000 or greater in debt and/or equity, suchnotes would become immediately due and the noteholder would receive one warrantfor the purchase of one share of common stock for every $4.00 of debt,exercisable at $4.00 per share for five years. As a result of the IPO, the notes were paid and accordingly, in December2003 the Company issued 175,000 warrants to purchase shares of commonstock.  The warrants were valued in theaggregate at $474,250, which will be treated as additional interestexpense.  The fair value of the warrantswas estimated on the grant date using the Black-Scholes pricing model with thefollowing assumptions: common stock based on a market price of $4.75 per share,zero dividends, expected volatility of 80%, risk-free interest rate of 2.5% andan expected life of three years.

 

In connection with the payment of interest on thesenotes payable, 60,148 shares were issued to the noteholders after November 30,2003.

 

(d)                Fiscal 2003unsecured convertible notes payable to foreign investors:

 

The unsecured convertible notes payable to foreigninvestors of $1,263,683 are net of unamortized discount of $642,665 as ofNovember 30, 2003.  The interest rate onthe notes is 10%.

 

During fiscal 2003 the Company sold approximately 25units in a foreign offering (the Foreign Units) at $50,000 per unit, totaling$1,263,683.  Each Foreign Unit iscomprised of one convertible debenture for $50,000 and five-year warrants topurchase 12,500 shares of the Company’s common stock at $4.00, totaling 315,920warrants.  The debentures areconvertible into common stock at $4.00 per share and are due June 30, 2004.

 

The warrants were valued at $496,653, which alsoresulted in an effective beneficial conversion feature of $496,653.  The estimated fair value of the warrants andbeneficial conversion feature totaling $993,305 is treated as a discount on thedebt and is being amortized over the term of the debenture.  The fair value of the warrants was estimatedon the grant date using the Black-Scholes pricing model with the followingassumptions: common stock based on a market price of $4.00 per share, zerodividends, expected volatility of 100%, risk-free interest rate of 6% and anexpected life of three years.

 

A placement agent received a 10% cash commission onForeign Units placed by the placement agent. In addition, the placement agent received warrants to purchase 31,592shares of the Company’s common stock at an exercise price of $4.00 per share,expiring five years from the date of grant. In addition, the placement agent may receive warrants equal to 10% of thetotal shares of common stock that are issued upon exercise of the warrants soldin the offering.

 

Subsequent to November 30, 2003, $1,205,508 of thesenotes was fully repaid in cash.

 

F-15

----

 

(e)                 Fiscal2001 convertible notes payable to investors:

 

The convertible notes payable to investors matured infiscal 2003 and were paid off in common stock. The interest rate on the notes is 10%, also payable in the form ofcommon stock at the rate of $8 per share.

 

During fiscal 2003, notes of $645,000 and accruedinterest of $125,432 were converted at maturity into 96,304 shares of commonstock of the Company, a conversion rate of $8.00 per share.  The holder of the remaining $500,000 ofnotes elected to receive payment in the form of cash and, as a result, theCompany had an option to pay the principal and accrued interest in cash or inthe form of the Company’s common stock at a rate of $4.00 per share.  During fiscal 2003, the Company exercisedits option and issued 149,520 shares of its common stock in payment of $500,000of principal and $98,080 in accrued interest under said note.

 

One of the notes was issued with warrants for thepurchase of 62,500 shares of common stock at an exercise price of $8 pershare.  The warrants expired unexercisedin fiscal 2002.

 

(f)                   Notes payableto individuals:

 

During fiscal 2003, noteholders converted the balanceof  $855,000 into the debt securitiessold in the PPO (See Note 2b above). Of these notes, $110,000 was issued duringfiscal 2003, the balance in previous years. The notes were unsecured and had an interest rate of 10%.

 

(g)                Note payable to former officer:

 

The note payable to former officer had a maturity dateof July 1, 2003 and was extended to the earlier of December 31, 2003 or theclosing of an initial public offering. Interest is at 4.5% prior to July 1, 2003, and at 10% commencing July 1,2003.  The note is collateralized bysubstantially all the assets of the Company.

 

Subsequent to November 30, 2003, this amount wasrepaid in full.

 

(h)                Advances from officerand director:

 

Subsequent to November 30, 2003, an officer anddirector made additional advances of $114,958 and the Company repaid the totalof $364,958 that was outstanding.

 

F-16

----

 

5.                                       **STOCKHOLDERS’DEFICIT**:

 

On August 8, 2002, the Company’s directors andstockholders approved the Company’s 2002 Stock Option Plan (the “Plan”).  This Plan is intended to advance and promotethe interests of the Company by providing incentive to key employees, theemployees of any subsidiaries/affiliates acquired or established, and theCompany’s directors, consultants and advisors who contribute to the management,growth and protection of the Company to continue their service to the Company.  The Company reserved 250,000 shares ofcommon stock to be issued pursuant to the Plan.  There have been no options granted under the Plan, and this Planhas been replaced by the Company’s 2003 Stock Incentive Plan (the “2003 Plan”)that was adopted by the Board of Directors on August 4, 2003 and approved bythe Company’s stockholders on August 22, 2003. The 2003 Plan provides for the grant of stock options, restricted stockand stock appreciation rights.  TheCompany has reserved 900,000 shares of common stock to be issued under the 2003Plan.  No awards can be made under the2003 Plan after July 1, 2013.

 

During August 2003, the shareholders approved an amendment to theCompany’s articles of incorporation increasing the number of authorized sharesof common stock from 4,000,000 to 18,000,000 and creating a class of 2,000,000shares of preferred stock with rights, designations and preference to bedetermined by the Board of Directors from time to time.

 

During fiscal 2003 the Company issued common stock inthe following transactions:

 

•                 245,824shares were issued to investors in connection with certain convertible notes(See Note 2e above).

 

•                 9,592shares were issued in connection with the settlement of other obligations.

 

During fiscal 2003 the Company issued warrants and options to purchaseits common stock in the following transactions:

 

•                 352,000warrants to investors under the secured convertible debenture offering (SeeNote 2b).

 

•                 315,920warrants to foreign investors under the unsecured convertible debentureoffering (See Note 2d).

 

•                 51,842warrants to the placement agent of the secured and unsecured convertibledebenture offerings (See Note 2b and 2d).

 

•                 55,000warrants to an investor as partial consideration for the renewal and extensionof a certain note (see Note 2c).

 

•                 10,000options to an individual at $10 per share for consulting services.

 

•                 3,125warrants to an individual at $.01 per share in connection with a servicesagreement.  These warrants expiredSeptember 20, 2003.

 

F-17

----

 

During fiscal 2002, the Company issued 122,500 and 141,567 shares ofcommon stock for $485,000 in cash and the conversion of $566,266 of amountsowing to certain officers/directors/shareholders; respectively.

 

During fiscal 2002, in connection with an employmentseparation agreement with its Vice Chairman and Secretary, the Company issuedwarrants to purchase 80,733 shares of the common stock of the Companyexercisable at $0.01 per share for five years. The warrants were valued at $322,932. The fair value of the warrants was estimated on the grant date using theBlack-Scholes pricing model with the following assumptions:  common stock based on market price of $4.00per share, zero dividends, expected volatility of 100%, risk-free interest rateof 6% and an expected life of five years.

 

The Company’s outstanding warrants and options as ofNovember 30, 2003 can be summarized as follows:

 
| **Holder(s)**                                                       |   | **Number of  Warrants/  Options** |   | **Per Share  Exercise  Price** |   | **Expiration  Date** |                                 |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|----------------------|--------------------------------------|
|                                                                |   |                              |   |                           |   |                 |                                 |
| Former officer  in connection with termination agreement            |   | 80,733                            |   | $                              | 0.01   |                 | November 19, 2007                    |   |
| Secured  convertible debenture holders                              |   | 352,000                           |   | $                              | 4.00   |                 | December 31, 2007                    |   |
| Unsecured  convertible debenture holders under foreign offering     |   | 315,920                           |   | $                              | 4.00   |                 | June 30, 2008                        |   |
| Investors in  connection with note renewal and extension            |   | 55,000                            |   | $                              | 4.00   |                 | March 31, 2008 and June  30, 2008    |   |
| Placement agent  in connection with secured and unsecured offerings |   | 51,842                            |   | $                              | 4.00   |                 | December 31, 2007 and  June 30, 2008 |   |
| Individual in  connection with consulting agreement                 |   | 10,000                            |   | $                              | 10.00  |                 | —                               |   |
|                                                                |   |                              |   |                           |   |                 |                                 |
|                                                                |   | 865,495                           |   |                           |   |                 |                                 |

 

The Company has reserved for the issuance of optionsto purchase 75,000 shares exercisable at $10.00 per share and 115,000 shares ofcommon stock to certain individualsthat participated in the Company’s infomercial (See Note 7).

 

Subsequent to November 30, 2003, the Company andcertain officers entered into employment agreements.  Under these agreements, the Company agreed to award options topurchase an aggregate of 605,000 shares of its common stock at prices rangingfrom $3.20 to $5.00 per share.  Theoptions will be granted under the Company’s 2003 Stock Incentive Plan.  The options vest at various times over twoyears, although they vest immediately upon a change of control.  Initially, one of the agreements providedfor the granting of 100,000 shares of restricted stock that were valued at$500,000 and was to vest over a two-year period.  The agreement was amended to cancel this issuance of stock beforethe shares were issued.  Accordingly, inthe first quarter of fiscal 2004, the Company will recognize a non-cash compensationcharge of approximately $50,000 to only reflect compensation expense for theperiod before the agreement was amended.

 

F-18

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6.                                       **INCOMETAXES**:

 

The Company’s actualeffective tax rate differs from U.S. Federal corporate income tax rate of 34%as follows for the periods ended:

 

 
|                                                                                                                         |   | **November  30,********2003** |   | **November  30,********2002** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
|                                                                                                                         |   |                          |   |                          |   |
| Statutory rate                                                                                                               |   | (34.0                         | )%     | (34.0                         | )%     |
| State income taxes, net of Federal income tax benefit                                                                        |   | (3.3                          | )%     | (3.3                          | )%     |
| Increase (reduction) in valuation allowance related to net operating  loss carryforwards and change in temporary differences |   | 37.3                          | %      | 37.3                          | %      |
|                                                                                                                         |   |                          |   |                          |   |
|                                                                                                                         |   | 0                             | %      | 0                             | %      |

 

The components of the netdeferred tax asset recognized as of November 30, 2003 are as follows:

 

 
| Deferred tax assets (liabilities): |   |       |   |
|------------------------------------|--------|------------|--------|
| Current -                          |   |       |   |
| Allowance for doubtful accounts    |   | $          | 3,000  |   |
| Vacation accrual                   |   | 31,000     |   |
| Inventory reserve                  |   | 17,000     |   |
| Allowance for sales returns        |   | 10,000     |   |
| Non-current -                      |   |       |   |
| Net operating loss carryforwards   |   | 5,793,000  |   |
| Property and equipment             |   | 16,000     |   |
| Other                              |   | 46,000     |   |
| Valuation allowance                |   | (5,916,000 | )      |
|                               |   |       |   |
| Net deferred tax asset             |   | $          | — |   |

 

The valuation allowance was$4,546,000 at November 30, 2002 and increased by $1,370,000 for the year endedNovember 30, 2003.

 

At November 30, 2003, theCompany has approximately $15,600,000 available in net operating losscarryforwards which begin to expire from 2006 to 2021.

 

F-19

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7.                                       **COMMITMENTS**:

 

*OperatingLeases* – The Company leases office and warehousefacilities under an operating lease agreement. The lease provides for base rent plus the proportionate share ofproperty taxes and operating expenses. The lease expires in November 2004 with an option to renew for threeadditional years.  Since October 1,2002, the Company has been sub-leasing a portion of its office space to acompany owned by an officer and director of the Company.  Income from this sub-lease totaled $42,000and $7,000 in fiscal 2003 and 2002, respectively.  Total rent expense, net of this sub-lease income, wasapproximately $199,000 and $225,000 for fiscal 2003 and 2002, respectively.  Minimum future base rental payments are$144,137 in fiscal 2004.

 

*RoyaltyAgreements* – The Company has entered into a number ofroyalty agreements in connection with the production of its instructionalproducts.  Generally, the agreementsrequire the Company to pay a royalty for every unit sold.  Royalty expense under these agreements was$82,943 and $30,088 for fiscal 2003 and 2002, respectively and is included incost of products sold in the accompanying consolidated statements ofoperations.

 

*Endorsement Agreements* – The Company has an agreement with anindividual to promote the Company’s swing system, golf clubs and otherproducts.  This agreement provides formonthly payments of $3,000, plus $2,000 for each mutually agreed uponappearance.  The agreement expiredAugust 31, 2003, but has subsequently been renewed through August 31, 2008 onsimilar terms.

 

The Company had an agreement with a professional golfer, which expired infiscal 2003.

 

Subsequent to November 30,2003, the Company entered into an endorsement agreement with a professionalgolfer.  The agreement requires the Company to pay minimum compensation of $65,000 for2004, plus tournament incentive compensation based on his performance intournaments.  The agreement endsDecember 31, 2004, but can be extended for 2005 at the option of thegolfer.  Should the option be renewed in2005, the minimum compensation will be increased by $55,000.

 

*Infomercial Agreements**–*During2002, the Company entered into various agreements with certain individuals toparticipate in a new infomercial to advertise and promote the Company’sinstructional packages.  The Company’sobligations under these agreements terminated if it was not able to raisesufficient financing by November 1, 2002 to broadcast the infomercial under asustained advertising campaign.  TheCompany did not raise sufficient financing by this date, and as such theseagreements terminated as of November 1, 2002 without any liability orobligation to the infomercial participants. The Company, however, began broadcasting the infomercial on a periodicbasis beginning in December 2002 despite the termination of the infomercialagreements.  Based on the Company’speriodic use of the infomercial in and after December 2002, and its desire torun future periodic broadcasts, the Company accrued for its fee, commission andequity-based obligations under the terms of the original terminated agreementsas of November 30, 2003.

 

F-20

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The Company accrued $926,700for these obligations during fiscal 2003, of which $327,200 are payable incash, $139,500 are payable in options to purchase 75,000 shares exercisable at$10.00 per share (valued at $1.86 per option), and $460,000 payable in 115,000shares of the Company’s common stock (valued at $4.00 per share).** **Thefair value of the options was estimated using the Black-Scholes pricing modelwith the following assumptions:  commonstock based on a market price of $4.00 per share, zero dividends, expectedvolatility of 100%, risk-free interest rate of 6% and an expected life of threeyears.  The Company is currently in negotiations to settle the compensationowed under these agreements and, accordingly, the common stock and options havenot been issued and are recorded as issuable securities.  Subsequent to November 30, 2003 theCompany negotiated a settlement that calls for no issuance of options, and theissuance of 125,000 shares of common stock rather than 115,000 shares.  The value of the settlement is approximately$40,000 less than what was accrued at November 30, 2003.  As a result of this settlement, the Companywill record a gain of $40,000 in the first quarter of fiscal 2004.

 

*Merger Termination Agreement* – On March 18, 2003, the Company enteredinto a merger agreement with Wentworth II, Inc. (“Wentworth”).  During July 2003, the Company and Wentworthentered into a mutual termination agreement, which requires the Company to payto Wentworth approximately $56,000 as a break-up fee, including expenses.  Subsequent to November 30, 2003, theCompany paid Wentworth the remaining balance of $40,792 in connection with thisagreement.

 

*Marketing Agreement* – Subsequent toNovember 30, 2003, the Company entered into a Marketing Agreement to have atelevision series produced and aired featuring the Natural Golf Swing.  The television series will be aired infiscal 2004.  The marketing partner willalso be responsible for the promotion of the program on television and on theInternet.  The Company will also receivecommercial units for advertising within the television series.  In connection with this Agreement, theCompany has also agreed to purchase infomercial airing time.  Both the television series and infomercialsare expected to generate significant revenues and enhance the credibility ofthe Company.  The guaranteed commitmentunder this Agreement is approximately $1.2 million and will be payablethroughout fiscal 2004.

 

8.                                       **RETIREMENTPLAN**:

 

The Company adopted a 401(k)retirement plan effective August 1, 1999 that covers substantially allemployees with at least 30 days of service. Employees may contribute their eligible compensation to the plan,subject to the limits of Section 401(k) of the Internal Revenue Code.  The Company is not required to make anycontributions to the plan.  Nocontributions were made to the plan for fiscal 2003 or 2002.

 

9.                                       **BUSINESSSEGMENTS**:

 

The Company has identifiedits principal business segments as follows: sale of products generated in the field (Natural Golf Field Sales); saleof products through advertising and telemarketing (Natural Golf Products); andconducting golf instruction (Natural Golf Schools).  The Company’s reportable segments are strategic business unitsthat offer different products/services, are managed separately, and requiredifferent marketing strategies.  TheCompany evaluates performance based on results from operations before incometaxes not including nonrecurring gains and losses.

 

F-21

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|                                                                     |   | **FOR THE  YEAR  ENDED  NOVEMBER 30,  2003** |       | **FOR THE  ELEVEN  MONTHS  ENDED  NOVEMBER 30,  2002** |   |
|--------------------------------------------------------------------------|--------|----------------------------------------------|------------|--------------------------------------------------------|--------|
|                                                                     |   |                                         |       |                                                   |   |
| **REVENUE FROM EXTERNAL CUSTOMERS**:                                     |   |                                         |       |                                                   |   |
| Natural Golf  Products                                                   |   | $                                            | 5,527,537  |                                                   | $      | 5,923,727 |   |
| Natural Golf  Field Sales                                                |   | 2,574,312                                    |       | 3,361,716                                              |   |
| Natural Golf  Schools                                                    |   | 1,642,372                                    |       | 2,286,852                                              |   |
| Corporate                                                                |   | —                                       |       | —                                                 |   |
| Total revenue from  external customers                                   |   | $                                            | 9,744,221  |                                                   | $      | 11,572,295 |   |
|                                                                     |   |                                         |       |                                                   |   |
| **REVENUE FROM OTHER OPERATING  SEGMENTS, ELIMINATED IN CONSOLIDATION**: |   |                                         |       |                                                   |   |
| Natural Golf  Products                                                   |   | $                                            | 162,961    |                                                   | $      | 206,120 |   |
| Natural Golf  Field Sales                                                |   | 5,094                                        |       | 9,123                                                  |   |
| Natural Golf  Schools                                                    |   | —                                       |       | —                                                 |   |
| Corporate                                                                |   | 4,519,900                                    |       | 5,799,560                                              |   |
| Total revenue  from other operating segments                             |   | $                                            | 4,687,955  |                                                   | $      | 6,014,803 |   |
|                                                                     |   |                                         |       |                                                   |   |
| **OPERATING INCOME (LOSS)**:                                             |   |                                         |       |                                                   |   |
| Natural Golf  Products                                                   |   | $                                            | (2,192,383 | )                                                      | $      | (1,789,382 | ) |
| Natural Golf  Field Sales                                                |   | (611,835                                     | )          | (783,329                                               | )      |
| Natural Golf  Schools                                                    |   | (811,596                                     | )          | (799,265                                               | )      |
| Corporate                                                                |   | 605,139                                      |       | 1,593,030                                              |   |
| Total operating  income (loss)                                           |   | $                                            | (3,010,675 | )                                                      | $      | (1,778,946 | ) |
|                                                                     |   |                                         |       |                                                   |   |
| **INTEREST EXPENSE**:                                                    |   |                                         |       |                                                   |   |
| Natural Golf  Products                                                   |   | $                                            | —     |                                                   | $      | — |   |
| Natural Golf  Field Sales                                                |   | —                                       |       | —                                                 |   |
| Natural Golf  Schools                                                    |   | 11                                           |       | 1,551                                                  |   |
| Corporate                                                                |   | 2,267,700                                    |       | 422,769                                                |   |
| Total interest  expense                                                  |   | $                                            | 2,267,711  |                                                   | $      | 424,320 |   |
|                                                                     |   |                                         |       |                                                   |   |
| **DEPRECIATION AND AMORTIZATION**:                                       |   |                                         |       |                                                   |   |
| Natural Golf  Products                                                   |   | $                                            | —     |                                                   | $      | — |   |
| Natural Golf  Field Sales                                                |   | —                                       |       | —                                                 |   |
| Natural Golf  Schools                                                    |   | 966                                          |       | 885                                                    |   |
| Corporate                                                                |   | 274,250                                      |       | 108,382                                                |   |
| Total  depreciation and amortization                                     |   | $                                            | 275,216    |                                                   | $      | 109,267 |   |
|                                                                     |   |                                         |       |                                                   |   |
| **IDENTIFIABLE ASSETS**:                                                 |   |                                         |       |                                                   |   |
| Natural Golf  Products                                                   |   | $                                            | 28,238     |                                                   | $      | 91,933 |   |
| Natural Golf  Field Sales                                                |   | 2,215                                        |       | 31,411                                                 |   |
| Natural Golf  Schools                                                    |   | 2,172                                        |       | 3,772                                                  |   |
| Corporate                                                                |   | 2,106,819                                    |       | 1,817,938                                              |   |
| Total  identifiable assets                                               |   | $                                            | 2,139,444  |                                                   | $      | 1,945,054 |   |
|                                                                     |   |                                         |       |                                                   |   |   |   |
| **EXPENDITURES FOR LONG-LIVED ASSETS**:                                  |   |                                         |       |                                                   |   |
| Natural Golf  Products                                                   |   | $                                            | —     |                                                   | $      | — |   |
| Natural Golf  Field Sales                                                |   | —                                       |       | —                                                 |   |
| Natural Golf  Schools                                                    |   | —                                       |       | —                                                 |   |
| Corporate                                                                |   | 375,627                                      |       | 138,781                                                |   |
| Total  expenditures for long lived assets                                |   | $                                            | 375,627    |                                                   | $      | 138,781 |   |

 

F-22

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