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Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File
December 31, 1998 Number O-14146
S2 GOLF INC.
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(Exact name of registrant as specified in charter)
New Jersey 22-2388568
- ---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Gloria Lane
Fairfield, N.J. 07004
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(Address of principal executive offices) (Zip Code)
(973) 227-7783
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
Common Stock, Par Value $.01
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]
As of March 17, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $2,027,668. This calculation
is based upon the closing price of the registrant's common stock on March 17,
1999.
The number of shares of the registrant's Common Stock outstanding as of March
17, 1999 was 2,219,312.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
S2 Golf, Inc. (the "Company" or "Square Two") was incorporated under the laws of
the state of New Jersey in February 1982. The Company manufactures and markets a
proprietary line of golf equipment, including golf clubs, golf bags, golf balls
and accessories, throughout the United States. The Company markets these
products under the tradename and trademark SQUARE TWO(R) and uses several
additional trademarks including S2(R), PCX(R), XGR(R), ZCX(R), Totally
Matched(R) and Posiflow(R), among others.
The common stock of the Company (the "Common Stock") trades on the National
Association of Securities Dealers Automated Quotation System (Nasdaq) under the
trading symbol "GOLF."
During 1998, the Company introduced two new lines of low profile woods ("Lady
Rave" for women and "Rough Relief" for men), a new series of men's wedges
("TRAPMASTER"), a new line of offset oversized stainless steel heads ("TMPII"),
a line of women's irons to complement a popular line of woods ("Relief"), and
steel shafts in a value line of women's clubs that it previously marketed only
with graphite shafts ("Agree"). In addition, the Company redesigned both its
"Light and Easy(TM)" line for women and "Power Circle(TM)" line for men,
introduced the Lady Rave line of women's golf balls and golf gloves, and added
five new styles to its line of women's golf bags.
In the last five years, Square Two has effectively repositioned itself as one of
the top value brands in the women's golf market, which comprises between 58% and
62% of the Company's business. Because Square Two has pioneered improvements in
head design and shaft technology for women's clubs, the Company is able to
provide premium quality, high performance clubs at affordable prices.
Square Two has also begun to tap more aggressively into its 18-year partnership
with the Ladies Professional Golf Association (LPGA). Using input it received
from an advisory board of LPGA teaching professionals and through its
sponsorship of the Square Two/LPGA Custom Club Fitting Program, Square Two began
to introduce options in women's clubs that other manufacturers did not offer.
Recent cosmetic changes to the Company's lines of women's clubs have included
greater prominence for the distinctive LPGA logo, which all of Square Two's
women's clubs carry.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information about business segments in which the Company operates,
see Item 8, Financial Statements and Supplementary Data, and Note 12 to the
Financial Statements.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
CLUB DESIGN
The Company designs products for men and women of all ages and has two broad
design approaches. One targets the steel shaft market, and the other targets the
graphite shaft market.
The Company's "Totally Matched(R)" concept for steel shafts consists of matching
four key physical properties: swingweight, total weight, centers of percussion,
and centers of gravity. This total matching helps the golfer create a smoother,
more repeatable swing. To ensure that each of these properties is matched, the
Company manufactures its Totally Matched(R) steel shaft clubs one set at a time,
and every set is stamped with its own unique serial number for greater quality
control and consistency.
In recent years, the graphite shaft market has experienced tremendous growth.
The lighter weight and design flexibility of graphite shafts gives significant
advantages over steel shafts. The Company, recognizing that graphite is rapidly
reducing the demand for steel shafts, especially in women's products, is
concentrating its development efforts in this area.
PRODUCTS
The Company currently markets the following full line of golf equipment for both
men and women:
The "PCX II" line features cavity back, oversize elliptical head design for
irons with oversized metal woods. The woods feature a Synchro Speed System 1
graphite shafts. The irons feature lightweight steel shafts and are Totally
Matched. PCX II clubs are available for men only.
The "Light and Easy(TM)" line was redesigned in 1998 and features the LPGA logo,
lightweight steel or graphite shafts, cavity back, oversize, stainless steel
irons with steel or graphite shafts oversize, perimeter weighted metal woods.
Light and Easy(TM) clubs are available in Ladies' and Lady Petite(R) for
right-handed and left-handed golfers.
The "Power Circle(TM)" line was redesigned in 1998. These irons, which are
available in either steel or graphite shafts, feature oversize, full cavity
design engineered to resist twist at impact. Metal woods feature steel or
graphite shafts with oversize head designs. Power Circle clubs are available in
men's right hand and left hand models.
The "RAVE" graphite line features the Company's patented Posiflow weighting
system in its irons. The oversize stainless steel metal woods have expanded
sweet spots. Irons and woods feature ultra-light high modulous graphite shafts
which are matched to the player's swing speed. The RAVE graphite clubs are
available in right and left-handed Men's, Ladies' and Lady Petite(R) with the
LPGA logo.
In 1998, the Company also marketed the "Power Circle" and "Light and Easy"
Titanium driver series. The heads used on these clubs are 100% 6/4 Titanium.
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In 1998, the Company improved its value line of women's clubs with the
introduction of the "Agree" in steel shafts. Previously, the Agree was only
available in graphite shafts.
In 1998, the Company marketed the "ZCX-Ti" line of Titanium faced irons
available in right hand only. These irons feature 100% Titanium inserts for
enhanced feel and Posiflow weighting for less long iron fades and short iron
pulls.
In 1998, the Company marketed its "Lady Ti" line of Titanium faced irons.
Available in women's only, these irons feature 100% 6/4 Titanium inserts for
maximum energy transfer and high modulous lightweight shafts for improved
distance.
In 1998, the Company continued to sell its "Eight-Is-Enough" line of clubs for
junior golfers. These sets, which are available for both young men and women,
come in three different lengths and feature four irons, three woods and a
putter.
In 1998, the Company introduced its "Relief" iron as a complement to its popular
Relief wood series. Available exclusively for women, the driver, long, middle
and short Relief offer V-soles designed to be user-friendly in all playing
conditions.
In 1998, the Company continued to distribute its "WTD" or "Women's Tour Design"
wedge system. Designed for women, these wedges feature polymer inserts for
better bite on the green.
In 1998, the Company introduced its "TRAPMASTER" series of men's wedges.
Available in right hand only, these wedges feature 100% copper inserts for
improved ability to impart spin at impact.
In 1998, the Company introduced its "TMPII" line of offset oversized stainless
steel heads. Available in both steel and graphite, the TMPII offers superior
playability at affordable prices.
In 1998, the Company introduced its "Rough Relief" line of men's low profile
woods. Available with both steel and graphite shafts, the Rough Relief line
features dual brass inserts on the sole for increased playability.
In 1998, the Company introduced its "Lady Rave" low profile line of graphite
shafted woods. These easy to hit woods feature copper inserts in the sole for
added playability.
The Company continued to sell Hi-tech golf bags for men and women as well as a
new tripod design for the golfer who enjoys walking.
In 1998, the Company introduced the "Lady Rave" line of women's golf balls and
golf gloves. The Lady Rave ball and glove packaging for 1998 was designed as
part of the Company's desire to improve shelf appeal.
In 1998, the Company added five new styles to its women's bag line featuring
matching head covers. These bags are both functional and attractive.
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MANUFACTURING
The Company's clubs are assembled at its facility located in Fairfield, New
Jersey. Finished heads are purchased from several sources in Taiwan, Thailand
and The People's Republic of China, which manufacture them to Square Two's
appearance and weight specifications. Steel shafts, grips, and accessories are
supplied by various domestic and foreign shaft manufacturers. The Company
obtains its graphite shafts from several foreign shaft suppliers, which
manufacture them to the Company's design specifications. In the course of
assembling its PCXII line of steel shafted clubs, the Company applies its
Totally Matched proprietary weighting and balancing techniques to achieve the
clubs' unique design and construction.
SEASONALITY
The golf industry is seasonal. While manufacturing goes on throughout the year,
demand for the Company's clubs is greatest from March through July.
INVENTORY SUPPLY
The Company tries to maintain at least two sources of supply for irons and metal
wood heads from foreign suppliers. These suppliers generally require 90 to 120
day periods to deliver heads to the Company. Domestic suppliers of shafts and
grips are more plentiful and, under normal circumstances, can provide components
to the Company on relatively short notice.
While the Company does not anticipate long-term shortages of either components
or sources of supply from its domestic or foreign suppliers, no assurance can be
given that the Company will not experience shortages in the future. Delays are
not anticipated to be longer than two weeks and are not anticipated to
materially affect the Company's ability to deliver the product. The Company
continues to evaluate other alternatives in sourcing suppliers.
The Company has a line of credit in the amount of $5,000,000 with PNC Bank
pursuant to which PNC Bank may make available an additional credit facility of
up to $1,750,000 in the form of standby or documentary letters of credit and
demand loans. The amount and number of letters of credit outstanding at any
given time will vary on a daily basis depending on the dollar volume of material
being ordered and supplies received.
INDUSTRY BACKGROUND
The National Golf Foundation estimates that in 1997 there were 26.4 million
golfers in the United States. (1998 numbers are not yet available.) The rate of
growth increased 7% from 1996 to 1997. The popularity of the sport has created a
significant market for golf clubs. In competition for a share of the market,
various manufacturers have developed golf clubs using various materials,
differing types of construction and the latest engineering technology.
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MARKETING & DISTRIBUTION
Until approximately 15 years ago, top of the line golf equipment was sold almost
exclusively by golf professionals at private clubs. Currently, off course
specialty golf shops, sporting goods retailers, discounters, mail order houses
and infomercials account for a substantial share of the golf club market.
The golf equipment industry is one in which advertising and promotion is
required to create market awareness of a company's products. It is anticipated
that manufacturers will increase their research and development efforts as well
as their advertising expenditures.
As of February 23, 1999, the Company had established a network of approximately
1,900 retailers with approximately 2,400 retail outlets. The Company has
prepared a comprehensive catalog for its dealers.
In 1998, no customer accounted for more than 5% of the Company's total sales.
The Company does not believe that the loss of any single customer would
materially affect its business.
THE LADIES PROFESSIONAL GOLF ASSOCIATION AGREEMENT
The Company has entered into an agreement with the Ladies Professional Golf
Association (LPGA), an Ohio nonprofit corporation, which grants the Company the
exclusive right to use the LPGA name and logo on its women's golf clubs and the
non-exclusive right to use the LPGA name and logo on certain of its other
products, including golf bags. The Company has renewed and restated this
licensing agreement effective January 1, 1999 through December 31, 2003, at
which time the Company has the option to renew the agreement for two consecutive
years under the same terms and conditions. The agreement entitles the Company to
use the license granted on a worldwide basis. The Company is obligated to pay to
the LPGA a license fee and a royalty fee based on sales volume.
The minimum annual license fee for the term of the agreement is $200,000 each
consecutive year through 2003. In the event that the sum of (A) 5% of the net
sales of the licensed products (other than golf shoes) up to $1,000,000 in any
calendar year, (B) 2.5% of the net sales of the licensed products (other than
golf shoes) in excess of $1,000,000 and less than $5,000,000 in any calendar
year, (C) 1% of the net sales of the licensed products (other than golf shoes)
in excess of $5,000,000, and (D) 1% of the net sales of golf shoes in any
calendar year, exceeds the minimum license fee, the excess shall be paid as a
royalty fee.
Under the agreement, the Company is obligated to be a "Title Sponsor" of the
LPGA Teaching and Club Professionals ("T&CP") Division Team Classic at an annual
cost of $35,000 beginning in 1999 and increasing by $2,500 per year through
2003. In addition, the Company is obligated to spend a minimum of $75,000 per
year on various advertising programs.
COMPETITION
In general, the Company competes with manufacturers of sporting goods equipment
for all phases of the recreation industry, and its business is subject to
factors generally affecting the
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recreation and leisure market, such as economic conditions, changes in
discretionary spending patterns and weather conditions.
The golf club industry is highly competitive and is dominated principally by
approximately 15 nationally known manufacturers of sporting goods equipment.
Such manufacturers, including Callaway, Ping, Spalding, Taylor Made, and
Cobra/Titleist, possess financial and other resources greater than those of the
Company. The Company primarily competes with these entities on the basis of the
quality and value of Square Two's products and service, along with the Company's
position as the official sponsor of the LPGA.
Golf clubs are also manufactured by lesser known, lower volume companies who
assemble clubs from components manufactured by others. While these manufacturers
of clubs are generally smaller than the Company, their products also compete
with those manufactured by the Company.
PATENTS AND TRADEMARKS
The Company holds two United States patents. One protects the concept of
Posiflow weighting in iron heads, and the second protects an internal triangular
reinforcement cell for metal woods.
The Company has registered the following trademarks with the United States
Patent and Trademark Office:
TOTALLY MATCHED(R) TEE DEVIL(R) ONYX(R) TRI-BAR(R)
PCX(R) SQUARE TWO(R) S2(R)(Stylized) AGREE(R)
POSIFLOW(R) DYNA-BALANCE(R) LADY PETITE(R) MELODY(R)
ENGINEERED SSX(R) SAND DEVIL(R) ALLEGRA(R)
EXCELLENCE(R) DISTANCE DEVIL(R) TURF DEVIL(R) LLD(R)
ZCX(R) RUFF DEVIL(R)
Given the competitive climate within the golf industry worldwide and the recent
counterfeiting of clubhead designs, the Company believes that it is imperative
to protect the Company's tradenames, trademarks and patentable inventions and
designs.
EMPLOYEES
As of December 31, 1998, the Company employed 45 persons, including 43
full-time employees, of which two were executive officers. Thirty-six of these
were hourly employees and nine were management, administrative and marketing
personnel. Additional hourly employees are hired during peak production periods
and management anticipates no problems in finding adequate employees. The
employees of the Company are not represented by any labor organization. The
Company believes that its present staff is adequate. However, if
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sales of the Company's clubs should increase, it is anticipated that additional
production, clerical and management personnel may be necessary to meet product
demand.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The business, financial condition and results of operations of the Company may
be adversely affected by a number of factors. Certain statements and information
contained herein constitute "forward-looking statements" within the meaning of
the Federal Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the risks inherent in the development and
introduction of new products; the Company's dependence on consumer tastes which
fluctuate from time to time; seasonality and prevailing weather conditions as
protracted periods of inclement weather could disrupt consumer demand for
golf-related products; unanticipated shortages of components or delays in
component delivery and the significant competition in the Company's line of
business, as well as other risks and uncertainties.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
It is impracticable for the Company to provide financial information about
geographic areas. Historically, the Company's sales to external customers have
not been material. For the fiscal year ended December 31, 1998, the Company's
sales to foreign customers comprised less than 1.5% of net sales.
ITEM 2. PROPERTIES
The Company currently leases its manufacturing, sales and executive offices
located at 18 Gloria Lane, Fairfield, New Jersey 07004. The Company exercised
its option to renew its lease at such facility through December 31, 1999. The
lease covers 20,612 square feet. The Company believes that this space is
adequate for its current production levels. See Note 7, Leased Properties, of
Notes to Financial Statements for additional information regarding this lease.
ITEM 3. LEGAL PROCEEDINGS
No material lawsuits or claims are presently pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to shareholders for vote during the quarter
ended December 31, 1998.
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EXECUTIVE OFFICERS OF THE COMPANY
See Part III, Item 10 of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on Nasdaq under the trading symbol
"GOLF." The following table sets forth the high and low bid price for the Common
Stock as provided by Nasdaq for the periods indicated. These prices represent
quotations between dealers, do not include retail markups, markdowns or
commissions and do not necessarily represent prices at which actual transactions
were effected.
<TABLE>
<CAPTION>
PERIODS: COMMON STOCK BID PRICES:
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High Low
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<S> <C> <C>
1997 1st Quarter $1.94 $ .81
1997 2nd Quarter $2.75 $1.50
1997 3rd Quarter $3.63 $2.38
1997 4th Quarter $5.00 $3.06
1998 1st Quarter $11.31 $4.38
1998 2nd Quarter $8.81 $4.31
1998 3rd Quarter $6.00 $2.50
1998 4th Quarter $5.25 $2.00
</TABLE>
On March 17, 1999, the number of holders of record of the Company's Common Stock
was approximately 214. No cash dividends have been paid to date and it is not
anticipated that cash dividends will be paid in the near future.
In 1998, the Company issued 354 shares of Common Stock to Frederick B.
Ziesenheim and 354 shares of common stock to Mary Ann Jorgenson as compensation
for their service as directors of the Company and participation in board
meetings. As no public offering was involved, the issuance of such shares was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. See Item 11.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
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1998 1997 1996 1995 1994
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Operating Results:
<S> <C> <C> <C> <C> <C>
Net Sales $11,505,000 $12,073,843 $8,563,588 $7,243,307 $8,788,962
Net Income (Loss) 440,848 855,565 118,884 (80,468) 228,501
Net Income (Loss)
per Share-Basic 0.20 0.39 0.05 (0.04) 0.10
per Share-Diluted 0.19 0.37 0.05 (0.04) 0.10
Weighted Average
Number of Shares
Outstanding-Basic 2,219,078 2,214,448 2,208,311 2,205,647 2,194,009
Outstanding- Diluted 2,315,149 2,290,505 2,208,311 2,205,647 2,194,009
Cash Dividend 0 0 0 0
At Year End:
Working Capital 3,766,986 3,435,345 2,401,904 2,320,912 2,237,524
Total Assets 7,534,080 7,630,176 5,153,651 4,726,353 5,406,726
Total Liabilities 3,582,138 4,123,082 2,513,551 2,205,137 2,830,012
Long Term
Obligations: 146,157 202,231 253,498 315,206 343,214
Shareholders'
Equity 3,951,942 3,507,094 2,640,100 2,521,216 2,576,714
Market Price of
Common Stock
High-Low 11.3125/2.00 5.00/.81 1.75/.81 2.50/.81 2.75/1.75
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations constitutes forward-looking
information that involves certain risks and uncertainties. See Item 1, Business,
under caption "Special Note on Forward Looking Statements."
RESULTS OF OPERATIONS
Sales
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1998 Compared to 1997
For the year ended December 31, 1998, net sales were $11,505,000, versus
$12,073,843 for the year ended December 31, 1997, a decrease of $568,843 or
4.7%. The decrease in volume was
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primarily due to the Company's decision to halt shipments to retailers with
credit problems and the general softness in the golf equipment industry in 1998.
1997 Compared to 1996
For the year ended December 31, 1997, net sales were $12,073,843 versus
$8,563,588 for the year ended December 31, 1996, an increase of $3,510,255. The
increase in sales volume was primarily the result of continued improvement of
the sales force, a more cosmetically appealing product line and the addition of
a new channel of distribution: specialty sporting goods stores.
Gross Profit
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1998 Compared to 1997
Gross profit on sales for the year ended December 31, 1998 was 33.4% versus
32.8% for the year ended December 31, 1997. The increase was due to lower
material costs and product mix.
1997 Compared to 1996
Gross profit on sales for the year ended December 31, 1997 was 32.8% versus
32.2% for the year ended December 31, 1996. The increase of approximately 0.6%
is the result of the increased sales volume and lower material costs.
Selling Expenses
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1998 Compared to 1997
Selling expenses for the year ended December 31, 1998 were $1,540,048 versus
$1,551,552 for the year ended December 31, 1997. This decrease was the result of
lower sales commission expense due to reduced volume and lower advertising
costs, offset by an increase in the royalty payment to the LPGA.
1997 Compared to 1996
Selling expenses for the year ended December 31, 1997 were $1,551,552 versus
$1,251,688 for the year ended December 31, 1996, an increase of $299,864. This
increase was primarily the result of increased commission expense due to
increased sales volume offset by a decrease in sales salaries, as well as
increased advertising expense.
General Administrative
- ----------------------
1998 Compared to 1997
General and Administrative expenses were $1,228,559 for the year ended December
31, 1998 versus $1,187,444 for the year ended December 31, 1997. This was the
result of an increase in the Company's bad debt expense offset by lower
executive bonus expense and a decrease in
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amortization relating to the non-compete agreement with a former officer, which
was fully amortized in 1997.
1997 Compared to 1996
General and Administrative expenses increased $71,813 to $1,187,444 for the year
ended December 31, 1997 compared to $1,115,631 for the year ended December 31,
1996. This increase was primarily the result of an increase in the allowance for
doubtful accounts offset by a decrease in amortization expense related to a
non-compete agreement with a former officer which was fully amortized in June of
1997.
Interest
- --------
1998 Compared to 1997
Interest expense for the year ended December 31, 1998 was $368,285, an increase
of $90,431 or 32.5% compared to the year ended December 31, 1997, which was
$277,854. The average outstanding balance of the credit facility was $3,910,051
in 1998 compared to an average balance of $2,454,918 in 1997. This increase was
attributed to a 65.6% increase in the average inventory balance of $4,452,970 in
1998 compared to an average balance of $2,689,140 in 1997. Average balances for
accounts receivable in 1998 of $3,997,686 were also 11.9% higher than the 1997
balance of $3,572,253.
1997 Compared to 1996
Interest expense increased $45,022 to $277,854 for the year ended December 31,
1997 compared to $232,832 for the year ended December 31, 1996. This is the
result of an increase in the average outstanding balance of the credit facility
of $2,454,918 in 1997 versus $2,028,714 in 1996.
Income Taxes
- ------------
1998 Compared to 1997
In 1998 the Company had an income tax provision of $254,282 compared to $89,230
in 1997. The tax benefit from the net operating loss carryforward ("NOL") was
approximately $20,734 in 1998, which was 92% less than the tax benefit in 1997.
In 1998 the Company utilized the balance of the net operating loss carryforward.
1997 Compared to 1996
The Company had a 1997 tax provision of $89,230 compared to a benefit of $6,217
in 1996. The provision is the result of total taxable income, net of state tax
and deferred benefits, exceeding the available net operating loss carryforward.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $331,641 for the year ended December 31,
1998 to $3,766,986, compared to $3,435,345 for the year ended December 31, 1997.
This change was the result of a decrease in current assets of $153,229 offset by
a decrease in current liabilities of $484,870. The decrease in current assets
was due to a decrease of $119,855 in cash, a decrease in accounts receivable of
$410,046, which was a result of decreased sales in the 3rd and 4th quarters, and
a decrease of $156,907 in current deferred income taxes, offset by an increase
to inventory of $545,821. The increase in inventory was attributable to
increased purchases in the 4th quarter of 1997 and the first two quarters of
1998 in anticipation of higher sales volume in 1998. In the last two quarters of
1998, the inventory decreased by 30.7%. The decrease in current liabilities was
attributed to a 46.6% decrease, of $283,875, in accounts payable and accrued
expenses as of December 31, 1998. In addition, the revolving line of credit and
the current portion of long term debt decreased by $154,953 to $2,766,879.
Cash provided by operating activities in 1998 amounted to $57,395 as compared to
cash used in operations of $1,177,537 in 1997 and $168,962 in 1996. The cash
provided from operations in 1998 was primarily due to a decrease in Accounts
Receivable and Prepaid Expenses offset by a decrease in Accounts Payable and
Other Accrued Liabilities.
CREDIT FACILITY
The Company has a secured revolving line of credit with PNC Bank, which was
amended and restated as of December 1, 1997, allowing a maximum credit limit of
$5,000,000, less 50% of the aggregate face amount of all outstanding Letters of
Credit, and subject to various borrowing bases. The availability of funds under
this line of credit varies as it is based, in part, on a borrowing base of 80%
of eligible accounts receivable and 50% of qualified inventory. Substantially
all of the Company's assets are used as collateral for the credit line. Interest
rates are at prime plus one-quarter percent, paid monthly; the interest rate as
of December 31, 1998 was 8%. At December 31, 1998, the Company's availability on
the line of credit was approximately $757,965. Outstanding letters of credit as
of December 31, 1998 were $13,276.
The credit facility contains certain covenants which, among other items, require
the maintenance of certain financial ratios including tangible net worth and
working capital. Any event of default under the credit facility permits the
lender to cease making additional loans thereunder. The Company was in
compliance with all covenants and conditions of the facility as of December 31,
1998.
YEAR 2000
The Company has completed a review of its information systems and applications
in preparation for the Year 2000. The Company expects to incur internal staff
costs as well as outside consulting and other capital expenditures related to
this initiative. Total incremental expenses to remediate and bring current
systems into compliance are not expected to exceed $100,000. The Company
believes that it will be Year 2000 compliant in the fourth quarter of 1999. The
Company believes its vendors and other third parties will be converted timely
and present no
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Year 2000 issues. None of the Company's products or manufacturing systems will
be affected by the Year 2000 issue. System upgrades are scheduled to be
implemented on a timely basis and should not impact operations or financial
reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index to Financial Statements and Financial Statement Schedule on
page F-1 for the required information.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's current directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert L. Ross 54 Chairman of Board and Chief Executive
Officer
Douglas A. Buffington 43 Director, President, Chief Financial Officer,
Chief Operating Officer and Treasurer
Randy A. Hamill 43 Senior Vice President of Manufacturing
and Resources and Assistant Secretary
Richard M. Maurer 50 Director and Secretary
Mary Ann Jorgenson 58 Director
Frederick B. Ziesenheim 72 Director
</TABLE>
ROBERT L. ROSS has been a director of the Company since 1988 and Chairman of the
Board since October 1995. Effective in January 1996, Mr. Ross became Chief
Executive Officer of the Company. He has been Co-Managing Partner of Wesmar
Partners Limited Partnership ("Wesmar Partners"), the majority shareholder of
the Company, since 1985. Prior to the
13
<PAGE> 15
formation of Wesmar Partners, Mr. Ross was associated with The Hillman Company,
a private investment firm, from 1978 to 1985. Mr. Ross is a Certified Public
Accountant and was associated with Haskins & Sells and with Westinghouse
Electric Corporation prior to joining The Hillman Company.
DOUGLAS A. BUFFINGTON joined the Company in January 1994 as Vice President of
Sales and Marketing, and became Chief Financial Officer and Chief Operating
Officer in June 1994, President in December 1994, a director in February 1995
and Treasurer in January 1996. From 1992 until joining the Company, Mr.
Buffington served as General Manager of Simon-Duplex, a $25 million capital
goods division of Simon Engineering, a company based in the United Kingdom. From
1990 to 1992, he served as Vice President of Finance of Simon-Ltd., a $35
million division of Simon Engineering.
RANDY A. HAMILL has been Senior Vice President with the Company since July 1991
and is in charge of all manufacturing and purchasing. Effective in January 1996,
Mr. Hamill became Assistant Secretary of the Company. He was formerly Vice
President of Manufacturing of the Company from 1981 to July 1991.
RICHARD M. MAURER has been a director of the Company since 1988. Effective in
January 1996, Mr. Maurer became Secretary of the Company. He has been
Co-Managing Partner of Wesmar Partners, the majority shareholder of the Company,
since 1985. Prior to the formation of Wesmar Partners, Mr. Maurer was associated
with The Hillman Company, a private investment firm, from 1978 to 1985. Mr.
Maurer is a Certified Public Accountant and was associated with Price Waterhouse
prior to joining The Hillman Company.
MARY ANN JORGENSON has been a director of the Company since 1992. She has been a
partner with the law firm of Squire, Sanders & Dempsey L.L.P. since 1984 and has
been associated since 1975 with that firm. She also serves as a director of
Cedar Fair Management Company, the general partner of Cedar Fair, L.P., an owner
and operator of amusement parks, and is a director and Secretary of Essef
Corporation, a manufacturer of plastic pressure vessels for the water treatment
and systems industry, spa and pool equipment, and containers for hazardous waste
transportation.
FREDERICK B. ZIESENHEIM has been a director of the Company since 1992. He has
been with the law firm of Webb Ziesenheim Bruening Logsdon Orkin & Hanson, P.C.
since 1988 and is currently Vice Chairman of that firm. Prior to combining his
practice with that firm, he was President of the law firm of Buell, Ziesenheim,
Beck and Alstadt, P.C., with whom he had been associated since 1958.
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
14
<PAGE> 16
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company's directors, executive officers and any person
holding ten percent or more of the Company's Common Stock are required to report
their initial ownership of the Company's Common Stock and any changes in that
ownership to the Securities and Exchange Commission. Based solely on a review of
copies of the forms furnished to the Company in 1998 and written representations
from the Company's directors and executive officers, the Company believes that
all Section 16(a) filing requirements applicable to its directors, executive
officers and ten percent shareholders in 1998 were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual and
long-term compensation for services in all capacities paid by the Company for
the years ended December 31, 1998, 1997 and 1996 to or on behalf of Robert L.
Ross, Douglas A. Buffington and Randy A. Hamill (collectively, the "Named
Executives").
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
Name and Other Securities
Principal Annual Underlying All other
Position Year Salary Bonus Compensation Options Compensation
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Ross,
Chief 1998 $ 0 $ 0 $ 0 0 $ 0
Executive 1997 $ 0 $ 0 $ 0 50,000(5) $ 0
Officer 1996 $ 0 $ 0 $ 0 0
Douglas A. 1998 $137,362 $ 7,500(1) $19,992(4) 7,500(6) $975(7)
Buffington, 1997 $126,942 $31,250(2) $19,387(4) 0 $975(7)
President 1996 $109,612 $10,000(3) $17,813(4) 16,000 $975(7)
Randy A. 1998 $ 99,337 $ 4,375(1) 4,375(6)
Hamill, 1997 $ 96,688 $20,000(2) 0 44,267 0
Vice President 1996 $ 88,636 $ 4,000(3) 0 0 0
</TABLE>
(1) Bonus earned in 1998, paid in 1999.
(2) Bonus earned in 1997, paid in 1998.
(3) Bonus earned in 1996, paid in 1997.
(4) Represents an approximation of travel/commuting expenses reimbursed by the
Company.
(5) In October 1997, an option to purchase 100,000 shares of Common Stock was
erroneously granted to MR & Associates. Such option was subsequently
amended to be, as was intended, a grant of an option to purchase 50,000
shares of Common Stock to each of Mr. Ross and Mr. Maurer.
(6) Awarded for 1998 services, granted in 1999.
(7) The Company paid $975 annual premium on a $750,000 insurance policy on the
life of Mr. Buffington, which names Mr. Buffington's wife as the sole
beneficiary.
15
<PAGE> 17
The following table sets forth certain information pertaining to stock options
held the by the Named Executives as of December 31, 1998. No options were
exercised by the Named Executives in 1998.
1998 FISCAL YEAR END OPTION HOLDINGS
------------------------------------
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In-the-Money Options at
Options at Fiscal Year End Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert L. Ross 50,000 0 $ 0 0
Douglas A. Buffington 43,500 0 $44,188 0
Randy A. Hamill 44,267 0 $74,701 0
</TABLE>
(1) Calculated on the basis of the fair market value of the Common Stock of
$2.625 per share on December 31, 1998 less exercise price.
COMPENSATION OF DIRECTORS
The Company compensates its non-employee directors (Mary Ann Jorgenson and
Frederick B. Ziesenheim) by granting such persons shares of the Company's
Common Stock having a fair market value of $1,000 for every meeting of the Board
of Directors or committee thereof attended by such person, and shares of Common
Stock having a fair market value of $500 if such person participated in a
meeting by telephone. The number of shares issued is based on the closing price
of the stock on the exchange where traded on the meeting date or the preceding
date on which such shares were traded.
CERTAIN AGREEMENTS
The Company entered into a new employment agreement with Douglas A. Buffington
effective January 1, 1998 and terminating on December 31, 2002 unless terminated
sooner as provided in the agreement. Mr. Buffington's base annual salary under
the agreement was $137,500 for 1998 and $150,000 for each year thereafter. An
incentive cash bonus and stock option program are incorporated into the
agreement. Additional stock options, other than those provided in the incentive
program, may be granted at the discretion of the Company. The agreement also
provides for certain benefits, in addition to the standard Company employee
fringe benefits, including but not limited to reimbursement of certain expenses
and payment of premiums on a $750,000 life insurance policy with Mr.
Buffington's spouse named as beneficiary. The agreement also contains a
"non-compete" clause and an "invention and secrecy" clause.
In January 1997, the Company entered into an agreement with Randy A. Hamill
pursuant to which Mr. Hamill was granted an immediately exercisable option to
purchase 40,000 shares of Common Stock at an exercise price of $0.9375 per
share. Upon the occurrence of a change in control of the Company (as defined in
the agreement) the exercise price per share for any unexercised portion of the
option would be the lower of (a) (i) one cent or (ii) the lowest price greater
than one cent per share which would not cause the value to Mr. Hamill of shares
acquired upon exercise to be considered an "excess parachute payment" under
section 280G of
16
<PAGE> 18
the Internal Revenue Code of 1986 as amended or (b) $0.9375. In the event that
Mr. Hamill should die while employed by the Company and the Company has received
$500,000 as beneficiary of a life insurance policy it maintains on Mr. Hamill's
life, Mr. Hamill's estate will have the right to require the Company to purchase
the option, if unexercised, for $500,000 or, subject to certain limitations, to
purchase up to 39,999 shares received on exercise of the option for their fair
market value at that time.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 17, 1999 by (i) each person
who beneficially owned five percent or more of the outstanding Common Stock,
(ii) each director, (iii) each Named Executive and (iv) all directors and
executive officers as a group calculated in accordance with Rule 13d-3 under the
Exchange Act. Except as otherwise noted, the persons named in the table below
have sole voting and investment power with respect to the shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Amount
Beneficially Percent
Name and Address Owned (1) of Class (1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
L. R. Jeffrey (2) 250,000 11.3%
50 Gloucester Road
Summit, NJ 07901
Richard M. Maurer (3) 1,451,096 63.0%
Three Gateway Center
Pittsburgh, PA 15222
Robert L. Ross (4) 1,451,096 63.0%
Three Gateway Center
Pittsburgh, PA 15222
Mary Ann Jorgenson 10,065 *
4900 Key Tower
127 Public Square
Cleveland, OH 44114-1304
Frederick B. Ziesenheim 10,548 *
700 Koppers Building
436 7th Avenue
Pittsburgh, PA 15219-1818
Douglas A. Buffington 43,500 2.0%
18 Gloria Lane
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C> <C>
Fairfield, NJ 07004
Randy A. Hamill (5) 55,517 2.5%
18 Gloria Lane
Fairfield, NJ 07004
Wesmar Partners (6) 1,399,096 63.0%
MR & Associates
Maurer, Ross & Co., Incorporated
Three Gateway Center
Pittsburgh, PA 15222
All directors and executive
officers as a group (6 persons)(7) 1,622,260 67.4
</TABLE>
- ---------------
*Less than one percent
(1) The numbers shown include shares covered by options that are currently
exercisable or exercisable within 60 days of March 17, 1999. The numbers
and percentages of shares owned assume that such outstanding options had
been exercised as follows: L. R. Jeffrey, Jr. - 250,000, Richard M. Maurer
- 50,000, Robert L. Ross - 50,000, Douglas A. Buffington - 43,500, Randy A.
Hamill - 44,267 and all directors and executive officers as a group -
187,767.
(2) Does not include 730 shares owned by various members of Mr. Jeffrey's
family with respect to which shares he disclaims any beneficial ownership.
(3) Includes 2,000 shares which are held directly by two trusts of which Mr.
Maurer is co-trustee and with respect to which he shares voting and
investment power and 1,399,096 shares owned directly by Wesmar Partners
with respect to which he shares voting and investment power and 50,000
shares underlying the option held directly by Mr. Maurer. Mr. Maurer is an
officer, director and principal shareholder of Maurer Ross & Co.,
Incorporated, the general partner of MR & Associates, and the managing
general partner of Wesmar Partners.
(4) Includes 1,399,096 shares owned directly by Wesmar Partners and 50,000
options underlying the options held by Mr. Ross. Mr. Ross is an officer,
director and principal shareholder of Maurer Ross & Co., Incorporated, the
general partner of MR & Associates, the managing general partner of Wesmar
Partners.
(5) Does not include shares owned by various members of Mr. Hamill's family
with respect to which shares Mr. Hamill disclaims any beneficial ownership.
(6) Wesmar Partners is a Delaware limited partnership whose partners are
Landmark Equity Partners III, L. P., a Delaware limited partnership, and MR
& Associates, a Pennsylvania limited partnership. MR & Associates is the
managing partner of Wesmar Partners. Messrs.
18
<PAGE> 20
Maurer and Ross are officers, directors and principal shareholders of
Maurer Ross & Co., Incorporated, a Pennsylvania corporation and the general
partner of MR & Associates.
(7) Does not include shares owned by various members of a certain officer's
family with respect to which shares such officer disclaims any beneficial
ownership. Includes 1,399,096 shares owned directly by Wesmar Partners (See
Notes 3, 4 and 6 above).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During the fiscal year ended December 31, 1998, Richard M. Maurer and Robert L.
Ross provided the Company with employee services on a non-compensated basis. Mr.
Maurer is Secretary and a director of the Company. Mr. Ross is Chief Executive
Officer, Chairman and a director of the Company.
During the fiscal years ended December 31, 1998 and 1997, the Company retained
the law firm of Webb Ziesenheim Bruening Logsdon Orkin & Hanson, P.C., of
which Frederick B. Ziesenheim, a director of the Company, is a Vice President
and member of the Management Committee, to represent the Company on various
intellectual property matters.
During the fiscal year ended December 31, 1998, the Company retained the law
firm of Squire, Sanders & Dempsey L.L.P., of which Mary Ann Jorgenson, a
director of the Company, is a partner, to represent the Company in various
matters.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedule on Page F-1 are filed as part of
this report.
(2) The financial statement schedule listed in the accompanying Index to
Financial Statements and Financial Statement Schedule on Page F-1 is filed as
part of this report.
(3) The Exhibits listed in the accompanying Exhibit Index are filed as part
of this report.
(b) No reports on Form 8-K were filed for the fourth quarter ended December 31,
1998.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
S2 GOLF INC.
Dated: March 22, 1999 By: s/s Douglas A. Buffington
-------------------------
Douglas A. Buffington
President, Chief Financial Officer,
Chief Operating Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
s/s Douglas A. Buffington Director, President, Chief March 29, 1999
- --------------------------- Financial Officer, Chief
Douglas A. Buffington Operating Officer and
Treasurer
s/s Robert L. Ross Chairman of the Board March 30, 1999
- --------------------------- and Chief Executive Officer
Robert L. Ross
s/s Richard M. Maurer Director and Secretary March 30, 1999
- ---------------------------
Richard M. Maurer
s/s Mary Ann Jorgenson Director March 30, 1999
- ---------------------------
Mary Ann Jorgenson
s/s Frederick B. Ziesenheim Director March 30, 1999
- ---------------------------
Frederick B. Ziesenheim
</TABLE>
20
<PAGE> 22
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Financial Statements Page
-------------------- ----
<S> <C>
Independent Auditors' Report F-2
Balance Sheets - As of December 31, 1998
and 1997 F-3
Statements of Operations - For the Years
Ended December 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows - For the Years Ended
December 31, 1998, 1997 and 1996 F-5
Statements of Changes in Shareholders' Equity - For the
Years Ended December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
and Reserves F-17
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-1
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of S2 Golf Inc.:
We have audited the accompanying balance sheets of S2 Golf Inc. as of December
31, 1998 and 1997, and the related statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the accompanying Index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of S2 Golf Inc. as of December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
- -------------------------
Parsippany, New Jersey
March 22, 1999
F-2
<PAGE> 24
<TABLE>
<CAPTION>
S2 GOLF INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
ASSETS (Note 5)
Current Assets
<S> <C> <C>
Cash $ 1,576 $ 121,431
Accounts Receivable (Net of Allowance
for Doubtful Accounts of $212,562 in 1998
and $320,930 in 1997 3,312,878 3,722,924
Inventory (Note 2) 3,640,123 3,094,302
Prepaid Expenses 32,418 44,660
Deferred Income Taxes (Note 6) 215,972 372,879
----------- -----------
Total Current Assets 7,202,967 7,356,196
Plant and Equipment - Net (Note 3) 59,442 79,474
Non-Current Deferred Income Taxes (Note 6) 118,056 30,034
Other Assets - Net (Note 4) 153,615 164,472
----------- -----------
Total Assets 7,534,080 7,630,176
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short term Borrowings (Note 5) $ 2,766,879 $ 2,921,832
Accounts Payable 324,849 608,724
Accrued Expenses 288,178 336,909
Other Current Liabilities 56,075 53,386
----------- -----------
Total Current Liabilities 3,435,981 3,920,851
Non-Current Liabilities 146,157 202,231
----------- -----------
Total Liabilities 3,582,138 4,123,082
Commitments and Contingencies (Notes 7 & 8)
Shareholders' Equity (Note 9)
Common Stock, $.01 Par; 12,000,000 Authorized
Shares: 2,219,313 and 2,218,605 Issued and
Outstanding at December 31, 1998 and 1997,
respectively 22,193 22,186
Additional Paid in Capital 4,040,795 4,036,802
Accumulated Deficit (111,046) (551,894)
----------- -----------
Total Shareholders' Equity 3,951,942 3,507,094
----------- -----------
Total Liabilities and Shareholders' Equity $ 7,534,080 $ 7,630,176
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS
F-3
<PAGE> 25
S2 GOLF INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales $ 11,505,000 $ 12,073,843 $ 8,563,588
Cost of Goods Sold 7,667,300 8,115,313 5,805,895
------------ ------------ ------------
Gross Profit 3,837,700 3,958,530 2,757,693
------------ ------------ ------------
Operating Expenses:
Selling 1,540,048 1,551,552 1,251,688
General & Administrative 1,228,559 1,187,444 1,115,631
------------ ------------ ------------
Total Operating Expenses 2,768,607 2,738,996 2,367,319
------------ ------------ ------------
Operating Income 1,069,093 1,219,534 390,374
------------ ------------ ------------
Other Income (Expense)
Interest Expense (368,285) (277,854) (232,832)
Other Income (Expense) (5,678) 3,115 (44,875)
------------ ------------ ------------
Other - Net (373,963) (274,739) (277,707)
------------ ------------ ------------
Income Before Income Taxes 695,130 944,795 112,667
Provision (Benefit) for Income Taxes (Note 6) 254,282 89,230 (6,217)
------------ ------------ ------------
Net Income $ 440,848 $ 855,565 $ 118,884
============ ============ ============
Earnings per Common Share - Basic $ 0.20 $ 0.39 $ 0.05
============ ============ ============
Diluted $ 0.19 $ 0.37 $ 0.05
============ ============ ============
Weighted Average Number of Shares Outstanding -
Basic 2,219,078 2,214,448 2,208,311
Diluted 2,315,149 2,290,505 2,208,311
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS
F-4
<PAGE> 26
S2 GOLF INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net Income $ 440,848 $ 855,565 $ 118,884
Adjustments to Reconcile Net Income to Net Cash Provided
By (Used in) Operating Activities:
Depreciation and Amortization 57,092 108,488 159,075
Deferred Income Taxes 68,885 (65,024) (26,807)
Issuance of Stock for Compensation 4,000 11,430 0
Allowance for Doubtful Accounts (108,368) 70,799 (34,244)
Allowance for Returns (10,000) (40,877) 19,552
Inventory Obsolescence Reserve (60,621) 22,702 38,876
Changes in Assets and Liabilities:
Accounts Receivable 528,414 (1,323,166) (325,357)
Inventory (485,200) (1,243,803) (216,831)
Prepaid Expenses 12,242 (2,307) 97,614
Prepaid Income Taxes 0 0 10,000
Other Assets (3,906) (31,289) 9,086
Accounts Payable (283,875) 378,634 78,992
Accrued Expenses (48,731) 141,608 (21,806)
Other Current and Non-Current Liabilities (53,385) (60,297) (75,996)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 57,395 (1,177,537) (168,962)
------------ ------------ ------------
INVESTING ACTIVITIES
- --------------------
Purchase of Equipment (22,297) (17,209) (21,795)
Investment in Square Two Golf New Zealand, Ltd. 0 0 11,129
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (22,297) (17,209) (10,666)
FINANCING ACTIVITIES
- --------------------
Proceeds from Line of Credit 12,070,901 12,434,713 8,206,401
Payments on Line of Credit (12,225,854) (11,285,127) (7,879,177)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (154,953) 1,149,586 327,224
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (119,855) (45,160) 147,596
CASH - BEGINNING OF PERIOD 121,431 166,591 18,995
------------ ------------ ------------
CASH - END OF PERIOD $ 1,576 $ 121,431 $ 166,591
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
- ----------------------------------
Cash Paid During the Year For:
Interest $ 361,644 $ 261,411 $ 219,728
Income Taxes (Net of Refund) 254,282 (9,295) 39,039
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS
F-5
<PAGE> 27
S2 GOLF INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK SHARE-
------------ PAID IN -------------- ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 2,208,311 $ 22,083 $ 4,025,475 - - $ (1,526,343) $ 2,521,215
Issuance of Common Stock - - - - - - -
Net Income 1996 118,884 118,884
-----------------------------------------------------------------------------------------------------
Balance - December 31, 1996 2,208,311 22,083 4,025,475 - - (1,407,459) 2,640,099
Issuance of Common Stock 10,294 103 11,327 - - - 11,430
Net Income 1997 855,565 855,565
-----------------------------------------------------------------------------------------------------
Balance - December 31, 1997 2,218,605 22,186 4,036,802 - - (551,894) 3,507,094
Issuance of Common Stock 708 7 3,993 - - - 4,000
Net Income 1998 440,848 440,848
-----------------------------------------------------------------------------------------------------
Balance - December 31, 1998 2,219,313 $ 22,193 $ 4,040,795 - - $ (111,046) $ 3,951,942
=====================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS
F-6
<PAGE> 28
S2 GOLF INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
S2 Golf Inc. (the "Company") was incorporated under the laws of the state of New
Jersey on February 2, 1982. The Company manufactures and markets a proprietary
line of golf equipment including golf clubs, golf bags, golf balls and
accessories. The Company markets these products under various tradenames and
uses several additional trademarks.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company sells to customers primarily throughout the United States, with a
small amount sold to customers overseas. The Company does not require collateral
on its trade receivables and while it believes its trade receivables, net of
allowance for doubtful accounts, will be collected, the Company anticipates that
in the event of default it would follow normal collection procedures. Overall,
the Company's credit risk related to its trade receivables is limited due to the
broad range of products and the large number of customers in differing
geographic areas.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, accounts receivable and accounts payable approximate
their carrying values due to the short-term nature of the instruments. The fair
value of short-term borrowings approximates their carrying value due to their
variable interest rate features which reprice quarterly.
INVENTORY
Inventory is valued at the lower of cost, determined on the basis of the
first-in, first-out method, or market.
PLANT AND EQUIPMENT
Plant and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is provided over the estimated useful service life.
F-7
<PAGE> 29
The estimated lives used in determining depreciation are:
Machinery and Equipment 5 Years
Furniture and Fixtures 7 Years
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter.
Maintenance and repairs are charged to operations as incurred.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of merchandise in fulfillment
of orders.
OTHER ASSETS
Other assets principally include patents, trademarks and a covenant not to
compete with a former officer of the Company. The patents and trademarks are
amortized on the straight-line method over 15 years. The covenant not to compete
was amortized over a five-year period on a straight-line method which began on
July 1, 1992 and ended in June 1997. Management periodically evaluates the
recoverability of intangible assets based upon current and anticipated net
income and undiscounted future cash flows.
EARNINGS PER SHARE
During the fiscal year ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 revises certain methodology for computing earnings per share ("EPS") and
requires the dual presentation of basic and diluted earnings per share. Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised and resulted in
the issuance of common stock that then shared in the earnings of the Company.
Diluted EPS is computed using the treasury stock method when the effect of
common stock equivalents would be dilutive. All prior periods have been restated
to comply with the provisions of SFAS No. 128. The only reconciling item between
the denominator used to calculate basic EPS and the denominator used to
calculate diluted EPS is the dilutive effect of stock options issued to
employees of the Company and other parties. The Company has issued no other
potentially dilutive common stock equivalents.
F-8
<PAGE> 30
2. Inventory
---------
Inventory consists of the following components at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Finished Goods $695,825 $819,423
Work in Process 25,000 25,000
Raw Materials 2,219,298 2,249,879
--------- ---------
$3,640,123 $3,094,302
========= =========
</TABLE>
3. Plant and Equipment
-------------------
Plant and equipment at December 31, were as follows:
<TABLE>
<S> <C> <C>
Machinery and Equipment $668,092 $645,795
Furniture and Fixtures 54,485 54,485
Leasehold Improvements 43,554 43,554
------- -------
Total 766,131 743,834
Less: Accumulated Depreciation
and Amortization 706,689 664,360
------- -------
$59,442 $79,474
======= =======
</TABLE>
Depreciation and amortization for the years ended 1998, 1997 and 1996 was
$42,329, $50,395 and $57,500, respectively.
4. Other Assets
------------
Other assets consists of the following at December 31, 1998, and 1997:
<TABLE>
<S> <C> <C>
Covenant Not to Compete $436,277 $436,277
Patents and Trademarks 222,920 219,014
Security Deposits 49,500 49,500
------- -------
Total $708,697 $704,791
Less: Accumulated
Amortization 555,082 540,319
-------- --------
$153,615 $164,472
======== ========
</TABLE>
Amortization expense for the years ended 1998, 1997 and 1996 was $14,763,
$58,093, and $101,575, respectively.
F-9
<PAGE> 31
5. Short term Borrowings
---------------------
The Company has a secured revolving line of credit with PNC Bank, which was
amended and restated as of December 1, 1997, allowing a maximum credit limit of
$5,000,000, less 50% of the aggregate face amount of all outstanding Letters of
Credit, and subject to various borrowing bases through September 1, 2000. The
availability of funds under this line of credit varies as it is based, in part,
on a borrowing base of 80% of eligible accounts receivable and 50% of qualified
inventory. Substantially all of the Company's assets are used as collateral for
the credit line. Interest rates are at prime plus one-quarter percent, paid
monthly; the interest rate as of December 31, 1998 was 8% compared to 8.5% as of
December 31, 1997. At December 31, 1998 and 1997, the Company's availability on
the line of credit was approximately $757,965 and $366,791, respectively.
Outstanding letters of credit as of December 31, 1998 and 1997 were $13,276 and
$0, respectively.
The credit facility contains certain covenants which, among other items, require
the maintenance of certain financial ratios including tangible net worth and
working capital. Any event of default under the credit facility permits the
lender to cease making additional loans thereunder. The Company was in
compliance with all covenants and conditions of the facility as of December 31,
1998.
6. Income Taxes
------------
The provision (benefit) for income taxes for the years ended December 31, 1998,
1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ 137,704 $ 61,912 $ 0
State 47,693 92,342 20,590
--------- --------- ---------
185,397 154,254 20,590
--------- --------- ---------
Deferred
Federal 53,363 (48,127) (20,765)
State 15,522 (16,897) (6,042)
--------- --------- ---------
68,885 (65,024) (26,807)
--------- --------- ---------
Total Provision (Benefit)
for Income Taxes $ 254,282 $ 89,230 $ (6,217)
========= ========= =========
</TABLE>
The Company's federal tax rate in 1998 was 34%, which is the rate applicable to
the company's taxable income under the federal rate structure. The 34% rate is
also a significant factor in the measurement of the deferred assets.
A summary of the differences between the actual income tax provision (benefit)
and the amounts computed by applying the statutory federal income tax rate to
income is as follows:
F-10
<PAGE> 32
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal Tax (Benefit) at
Statutory Rate $ 236,365 $ 321,230 $ 38,307
Increase (Decrease) in Taxes
Resulting From:
Utilization of NOL (20,734) (259,148) (62,967)
Travel and Entertainment 1,353 7,600 3,981
State Tax, Net of Federal
Tax Benefit 41,722 45,809 7,611
Other (4,424) (26,261) 6,851
--------- --------- ---------
Total Income Tax Provision
(Benefit) $ 254,282 $ 89,230 $ (6,217)
========= ========= =========
</TABLE>
In 1998, the Company utilized the balance of the net operating loss carryforward
("NOL"), which was approximately $60,980.
The tax effects of temporary differences and carryforward items that give rise
to significant portions of the current and noncurrent deferred tax assets at
December 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
December December
31, 1998 31, 1997
-------- --------
<S> <C> <C>
Allowance for Doubtful Accounts $ 136,021 $ 144,284
Accrued Expenses 79,951 131,070
Other 0 97,525
--------- ---------
Current Deferred Income Tax $ 215,972 $ 372,879
========= =========
Net Operating Loss 0 9,372
Non-Compete Agreement 80,771 (36,565)
Valuation Allowance 0 (9,372)
Other 37,285 66,599
--------- ---------
Non Current Deferred Income Tax $ 118,056 $ 30,034
========= =========
</TABLE>
7. Leased Properties
- -- -----------------
OPERATING LEASE
The Company leases factory and office space at 18 Gloria Lane, Fairfield, New
Jersey. On January 1, 1997, the Company and the lessor amended the lease to
extend its term to December
F-11
<PAGE> 33
31, 1998 with the option to renew for a one year period upon expiration. The
Company has renewed this option. The annual base rent for 1999 will be $118,519.
In addition to the base rent, the Company is obligated to pay its pro rata share
of real estate taxes, assessments and water and sewer charges. Total rent
expense for the years ended December 31, 1998, 1997 and 1996 was $119,269,
$118,519 and $118,514 respectively.
CAPITAL LEASE
The Company acquired a new show booth under a capital lease agreement in 1995.
This lease was completed in February 1998. As of December 31, 1998, the asset
associated with this lease was fully amortized.
8. Commitments and Contingencies
-----------------------------
ROYALTIES PAYABLE
Under the terms of an agreement with the Ladies Professional Golf Association
(LPGA), the Company is obligated to pay a license and royalty fee based upon
sales volume. Beginning in 1998, the minimum annual license and royalty fee is
$200,000 through December 31, 2003. The minimum annual fee is paid in equal
quarterly payments the first month of each quarter. The amount in excess of the
minimum is to be paid by April 30th of the following year. As of December 31,
1998 and 1997, the accrued royalty was $7,630 and $0, respectively. Royalty
expense for years ended December 31, 1998, 1997, and 1996 were $244,829,
$175,000 and $175,000, respectively.
In addition, the Company is obligated to spend a minimum of $75,000 per year on
various advertising programs and to be a "Title Sponsor" of the LPGA Teaching
and Club Professionals ("T&CP") Division Team Classic at an annual cost of
$35,000 beginning in 1999 and increasing by $2,500 per year through the term of
the agreement.
OTHER LIABILITIES
Under the terms of a Separation Agreement, the Company is obligated to pay its
former President $6,000 per month for a period of ten years which began on April
1, 1992 as consideration for his covenant not to compete with the Company (see
Note 4). The obligation is recorded at its present value in other current and
non current liabilities, and accrues interest at 9% per annum.
In connection with the Separation Agreement, the Company granted its former
President stock options for 250,000 shares of the Company's common stock
("Common Stock") at an exercise price of $4.48 per share, which was the average
of the closing bid and asked prices of the Company's Common Stock on the last
trading date immediately preceding the effective date of the grant. Subject to
certain limitations, the options were exercisable immediately and will remain
exercisable until April 16, 2006. If, and to the extent that, any amount is
realized in excess of the exercise price upon the sale of any Common Stock
obtained upon exercise of all or any part of the options, then
F-12
<PAGE> 34
65 percent of such excess amount, subject to certain limitations, is to be paid
to the Company in immediately available funds concurrent with the realization
event.
9. Stock Options and Grants of Stock
---------------------------------
Options have been granted to current and former officers, employees and
directors of the Company at the discretion of the Company's Board of Directors.
The table below summarizes all outstanding stock options.
<TABLE>
<CAPTION>
Number Weighted Average
of shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1995 552,920 $4.392
Granted 45,000 $1.601
Exercised - -
Canceled or expired 106,250 $5.000
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 491,670 $4.006
Granted 164,000 $2.232
Exercised - -
Canceled or expired 90,000 $5.000
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 565,670 $3.333
Granted 2,000 $4.250
Exercised - -
Canceled or expired - -
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 567,670 $3.336
</TABLE>
The Company applies the intrinsic value method in accounting for its stock
plans. Accordingly, no compensation cost has been recognized for stock option
grants issued to employees under any of the Company's stock option plans. If
compensation cost for stock option grants issued during 1998, 1997 and 1996 had
been determined under the provisions of SFAS No. 123, the Company's net income
would have been $436,331, $661,172, and $109,706, respectively. The Company's
net income per share for basic and diluted in 1998, 1997 and 1996 would have
been $.20 and $.19, $.29 and $.28, $.04 and $.04, respectively.
The fair value of each stock option granted under the Company's plans was
estimated on the date of grant using the Black-Scholes option pricing model. The
following weighted average assumptions were used to value grants issued under
the plans in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Annualized Volatility 70% 66%-83% 74%
Risk-free interest rate 5% 5% 5%
Expected term of option (in years) 3.5 3.5 3.5
Dividend Yield N/A N/A N/A
</TABLE>
F-13
<PAGE> 35
The weighted average fair values per share of stock options granted during 1998,
1997 and 1996 were $4.25, $2.23 and $1.60, respectively.
The exercise price ranges for options outstanding and exercisable at December
31, 1998 were:
<TABLE>
<CAPTION>
Exercise Price Number of Shares Outstanding Weighted Average
Range and Exercisable at Exercise Price
December 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
$0.50 to $2.00 174,000 $1.48
$2.01 to $5.00 393,670 $4.16
- ------------------ ------- -----
Total 567,670 $3.34
</TABLE>
The Company has generally granted options that do not expire.
NOTES ON CERTAIN OPTIONS
In connection with the Separation Agreement between the Company and its former
President, the Company issued an option to acquire 250,000 shares of Common
Stock to the former President in partial consideration for his covenant not to
compete with the Company for a period of 5 years beginning July 1, 1992. (See
Note 8.) Subject to certain limitations, the option may be exercised any time
prior to April 16, 2006 at a price of $4.48 per share.
During 1995, Mr. George H. Nichols, a director of the Company until October
1995, received reimbursement for certain expenses and $54,000 in consulting fees
at the rate of $6,000 per month from January through September. Under the
agreement, Mr. Nichols was granted an option to acquire 37,500 shares of the
Company's Common Stock at $1.875 per share, which exercise price was equal to
the price per share paid for Nasdaq's last Common Stock sale transaction on the
date of the grant. Such option is currently exercisable in full.
On November 1, 1995, the Company amended an employment agreement dated July 1,
1991 with the former Senior Vice President of Product Development in regards to
stock options granted. The amendment effectively canceled and forever terminated
stock options for 106,250 shares at an exercise price of $5.00 per share which
were granted under the 1984 stock incentive plan. At that time, the Company
granted, to become effective May 6, 1996, 40,000 shares of "new options" at an
exercise price of $1.6875 which represented the average of the Company's Nasdaq
bid and ask closing price on the grant date.
GRANTS OF STOCK TO DIRECTORS
The Company compensates its non-employee directors (Mary Ann Jorgenson and
Frederick B. Ziesenheim) by granting such persons shares of the Company's Common
Stock having a value of $1,000 for every meeting of the Board of Directors or
committee thereof attended by such person, and shares of common stock having a
value of $500 if such person participated in a meeting by telephone. The number
of shares issued is based on the closing price of the stock on
F-14
<PAGE> 36
the exchange where traded on the meeting date or the preceding date on which
such shares were traded.
10. Related Party Transactions
--------------------------
In 1994 and January through May 1995, Wesmar Partners provided the Company with
insurance coverage through the Liberty Mutual Insurance Company for property,
liability and workers compensation insurance. In 1996, the Company received
$10,198 from Wesmar Partners representing a retrospective adjustment for the
policy year 1994-1995.
During the fiscal year ended December 31, 1998, Richard M. Maurer and
Robert L. Ross provided the Company with employee services on a non-compensated
basis. Mr. Maurer is Secretary and a director of the Company and Mr. Ross is
Chief Executive Officer, Chairman and a director of the Company.
During the fiscal year ended December 31, 1998, 1997 and 1996, the Company
retained the law firm of Webb Ziesenheim Bruening Logsdon Orkin & Hanson, P.C.,
of which Frederick B. Ziesenheim, a director of the Company, is a Vice
Chairman, to represent the Company on various intellectual property matters.
The Company had paid Webb Ziesenheim Bruening Logsdon Orkin & Hanson, P.C.
$28,122, $17,524 and $25,605 in 1998, 1997 and 1996, respectively, and was
indebted in the amount of $877, $627 and $280 at December 31, 1998, 1997 and
1996, respectively.
During the fiscal year ended December 31, 1998, the Company retained the law
firm of Squire, Sanders & Dempsey L.L.P., of which Mary Ann Jorgenson, a
director of the Company, is a partner, to represent the Company on various
matters. At December 31, 1998, the Company was indebted to Squire, Sanders &
Dempsey L.L.P. in the amount of $1,173.
11. Reporting Comprehensive Income
------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" which was effective for the Company for the
year ended December 31, 1998. This Statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company has evaluated SFAS No. 130 and
determined that it has no impact on these financial statements.
12. Segments of an Enterprise
-------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which was
effective for the Company for years beginning after December 15, 1997. This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial
F-15
<PAGE> 37
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company operates in only one segment,
the manufacturing and marketing of golf equipment. Profitability and investment
decisions are made on a company-wide basis.
13. Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes new disclosure requirements, which provide a comprehensive
standard for recognition and measurement of derivatives and hedging activities.
This will require all derivatives to be recorded on the balance sheet at fair
value and special accounting for certain types of hedges. SFAS 133 will take
effect in 2000. The Company has not entered into any derivative or hedge
transactions and, therefore, does not believe that SFAS 133 will have a
material effect on its financial condition or results of operations.
14. Supplemental Disclosures of Non-Cash Transactions
-------------------------------------------------
During 1998, 1997 and 1996, the Company recorded certain non-cash charges of
$20,734, $25,130 and $29,150, respectively, representing accrued interest for a
liability to its former President in connection with his Separation Agreement
(see Note 8).
In 1997, the Company issued Common Stock in the amount of $11,430 for services
rendered in 1997.
F-16
<PAGE> 38
S2 GOLF, INC.
-------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-----------------------------------------------------
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
of Period Expenses Accounts Deductions of Period
--------- -------- -------- ---------- ---------
YEAR ENDED:
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
<S> <C> <C> <C> <C> <C>
December 31, 1996 $284,375 $75,000 --- $109,244 (1) $250,131
December 31, 1997 250,131 159,000 --- 88,194 (1) 320,930
December 31, 1998 320,930 268,450 --- 376,818 (1) 212,562
ALLOWANCE FOR RETURNS
December 31, 1996 52,607 212,797 --- 203,404 62,000
December 31, 1997 62,000 184,289 --- 157,657 88,632
December 31, 1998 88,632 135,930 --- 136,562 88,000
ALLOWANCE FOR DISCOUNTS
December 31, 1996 71,325 228,117 --- 208,565 90,877
December 31, 1997 90,877 128,977 --- 169,854 50,000
December 31, 1998 50,000 225,427 --- 235,427 40,000
INVENTORY OBSOLESCENCE RESERVE
December 31, 1996 161,498 38,876 --- --- 200,374
December 31, 1997 200,374 72,000 --- 49,298 223,076
December 31, 1998 223,076 --- --- 60,621 162,455
</TABLE>
(1) Uncollectible Accounts Written Off, Net of Recoveries
F-17
<PAGE> 39
Exhibit Index
-------------
Exhibit
Number Description of Exhibit*
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company dated
June 28, 1991 (incorporated by reference to Exhibit 3.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1991).
3.2 Amended and Restated By-laws of the registrant dated December 6, 1991
(incorporated by reference to Exhibit 3.2 of the registrant's Annual
Report on Form 10-K for the year ended December 31, 1991).
4.1 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988 (incorporated by reference to Exhibit 4.4 of the
registrant's Registration Statement No. 33-37371 on Form S-3).
4.2 Common Stock Purchase Warrant in favor of Wesmar Partners dated
February 28, 1988 (incorporated by reference to Exhibit 4.5 of the
registrant's Registration Statement No. 33-37371 on Form S-3).
4.3 Stock Option Agreement between the registrant and Wesmar Partners
dated February 29, 1988 (incorporated by reference to Exhibit 4.6 of
the registrant's Registration Statement No. 33-37371 on Form S-3).
10.0 Credit Agreement and Security Agreement between the registrant and
Midlantic Bank, National Association dated December 29, 1994
(incorporated by reference to Exhibit 99 of the registrant's Current
Report on Form 8-K dated December 26, 1994).
10.1 United States Patent No. 4,203,598 issued to the registrant
(incorporated by reference to Exhibit 10.3 of the registrant's
Registration Statement No. 33-16931 on Form S-1).
10.2 Amended and Restated Licensing Agreement between Ladies Professional
Golf Association and the registrant dated July 1, 1996 (incorporated
by reference to Exhibit 12 of the registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.3 Lease Agreement between the registrant and 12 Gloria Lane Limited
Partnership dated June 22, 1989 (incorporated by reference to exhibit
10.6 of the registrant's Registration Statement No. 33-37371 on Form
S-3).
10.4 Modification of Lease Agreement between the registrant and 12 Gloria
Lane Industrial Partnership dated October 3, 1995 (incorporated by
reference to Exhibit 10.2 of the registrant's Annual Report on Form
10-K for the year ended December 31, 1995).
10.5 1984 Incentive Stock Option Plan of the registrant dated February 10,
1984 (incorporated by reference to Exhibit 10.7 to the registrant's
Registration Statement No. 33-16931 on Form S-1).
F-18
<PAGE> 40
10.6 Consulting Agreement between the registrant and MR & Associates dated
January 1992 (incorporated by reference to exhibit 10.10 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.7 Amendment of Consulting Services Agreement between the registrant and
MR and Associates effective as of February 1, 1996 (incorporated by
reference to Exhibit 10.6 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
10.8** 1992 Stock Plan for Independent Directors of S2 Golf, Inc. dated
December 28, 1992 (incorporated by reference to Exhibit 10.11 of the
registrant's Annual Report on form 10-K for the year ended December
31, 1992).
10.9** Employment Agreement between the registrant and Douglas A. Buffington
dated January 1, 1995 (incorporated by reference to Exhibit 10.10 to
the registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.10** Agreement between the registrant and Randy A. Hamill dated January 2,
1997 (incorporated by reference to Exhibit 10.10 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.11 Second amendment to loan and security agreement between registrant and
PNC Bank dated December 1, 1997 (incorporated by reference to Exhibit
10.12 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1997).
27 Financial Data Schedule.
- --------------------------------------------------------------------------------
* In the case of incorporation by reference to documents filed by the registrant
under the Exchange Act, the registrant's file number under the Act is 0-14146.
** Management contract or management compensatory plan or arrangement.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000782126
<NAME> S2 GOLF INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,576
<SECURITIES> 0
<RECEIVABLES> 3,525,440
<ALLOWANCES> 212,562
<INVENTORY> 3,640,123
<CURRENT-ASSETS> 7,202,967
<PP&E> 766,131
<DEPRECIATION> 706,689
<TOTAL-ASSETS> 7,534,080
<CURRENT-LIABILITIES> 3,435,981
<BONDS> 0
0
0
<COMMON> 22,193
<OTHER-SE> 3,929,749
<TOTAL-LIABILITY-AND-EQUITY> 7,534,080
<SALES> 11,505,000
<TOTAL-REVENUES> 11,505,000
<CGS> 7,667,300
<TOTAL-COSTS> 2,768,607
<OTHER-EXPENSES> 5,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368,285
<INCOME-PRETAX> 695,130
<INCOME-TAX> 254,282
<INCOME-CONTINUING> 440,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 440,848
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
</TABLE>
